Community Token Economies

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* White Paper: Community Token Economies (CTE): Creating sustainable digital token economies within open source communities. By Jamie Burke et al. Outlier Ventures, September 2017

URL = pdf

Abstract

"This white paper is a review of the current state of the ‘ICO’ (initial coin offering) phenomena that has emerged since 2013, and has now gone mainstream in the early part of 2017. It discusses its benefits as an innovation, primarily to better enable open source communities to self-finance and realise new decentralised digital economies that are inherently less fragile when compared to traditional venture capital backed models.

It looks pragmatically at the flaws of ICOs and how they can be improved upon. In particular, we provide an analysis of a trend we are seeing organically emerge from the space we have termed ‘Community Token Economies’ (CTE). This is where multiple parties join forces to realise what we have refer to as Minimum Viable Community (MVC), in order to achieve network effects more efficiently and rapidly compared to going it alone.

Finally, we describe the implementation of a new framework being developed at Outlier Ventures to allow this to happen in a more structured and effective manner. Our aim is to ensure these new digital economies are increasingly self-sustaining. (​www.outlierventures.io)


Excerpt

Foreword by Jamie Burke, Outlier Ventures

"Since the inception of Bitcoin in 2009 a growing global community has emerged taking many of its underlying technologies and principles and applying them beyond a simple ‘Internet of Money’ to a wider range of industries and use-cases. This community has broadly referred to itself as ‘the blockchain community’, even though in many cases there were technically no chains of blocks involved.

In large part these startups were financed conventionally through VC money and set out to build a mix of proprietary and open source technologies with conventional ‘rent seeking’ or software consulting business models around them. During that phase, most people - including those trying to build the businesses - felt a silent unease about trying to apply Web 2.0 thinking to what was clearly a new paradigm. Most importantly, trying to build sustainable moats with defensible IP on what was in essence an open-source movement.

The question ‘what is blockchain’s killer app?’ haunted everyone, including my own VC firm Outlier Ventures. It wasn’t until the early part of this year (2017) when the principle that all startups could, although not necessarily should, issue their own tokens through what is commonly referred to as an ICO (Initial Coin Offering, aping IPOs) became more widely accepted by the community.

This has seen a flurry of experimentation in token design and growing commentary exploring how this could fundamentally change the market dynamics of industries where tokens become the predominant form of financing. Whilst it is still early days it looks like one of the, if not THE, killer app for blockchain is the ability in and of itself for open source projects to tokenise value. This killer application has already begun to break out of the ‘blockchain’ echo chamber and go mainstream.

The critical innovation is that now a development team anywhere in the world can issue a unique and cryptographically secure digital token to underpin value within the protocol or application layer of a new financial system. Furthermore they can, if they so wish, directly hard code the rules and economic principles they would like to see in the system to incentivise or disincentivise certain behaviours.

This token financialises value directly and allows for liquid secondary markets of exchange. This value can be fractionalised to allow any level of participation down to the smallest of micro-transactions. In principle anyone, anywhere, can participate in these new digital economies before, during, or after they have been created; allowing all parties to have a stake in their success through a form of decentralised ownership.

This is a truly revolutionary moment which turns decades of financing technological innovation on its head. It is this exciting new world we want to explore with you... " (https://gallery.mailchimp.com/65ae955d98e06dbd6fc737bf7/files/02455450-8a66-4004-965a-cf2f19fed237/Community_Token_Economy_Whitepaper_1.0.1_2017_09_01.pdf)


Discussion

A critique by James Quilligan

James Quilligan:

"What is Jamie Burke’s community? It's comprised, he says, of “the combination of expertise in cryptography, smart contracts, and game theory” (page 9) from competing teams who join through a collectively owned protocol and shared ‘Community Token’. Within this group, Burke wants to “incentivize collaborative behaviors” Page 10), but only with reference to a market. Is this a distributed network for peer-to-peer production, based on common ownership of product shares for the greater community — or is it, rather, a governance-and-coordination model expressly designed to create, manage and maximize network effects through the greater community by the consolidated technocratic community?

Like the rhetoric for deregulating and liberalizing financial capital in neo-liberalism, this is about realizing ‘an equitable, open source, decentralized market’ (Page 10). The question is, what community will gain from this mutual benefit? It’s clear that the organizers are themselves both the community and the beneficiaries; everyone else is simply a market of token users. The ‘community consensus’ is simply the consensus of stakeholders.

And is it democratic? Only the three founding members have *equal* votes in deciding the core development roadmap (Page 16), and these three persons are entitled to create their own apps for CTE in the development of supplementary markets (page 22), which serve the function of bonds for the valuation of the tokens. Hardly democratic; more like the Executive Board of a Central Bank.

And who are the actual stakeholders: a token-producers foundation of engineers, enthusiast, software developers and early investors, which will create a non-profit foundation and brand it as a public institution dedicated to providing a public utility (page 10). All of the producers and managers who support this financially will be shareholders in the nonprofit foundation. This foundation will also stimulate the project by offering cash to associates for codes and licenses, which will expand the scope of the foundation’s influence (pages 23-24), thus building greater network effects.

Then, the foundation will offer its tokens to organizations in the ‘sharing economy’ — that is, organizations involved in redistribution markets, product service systems and collaborative lifestyles, all of which are rent-seeking activities. The aim, then, is to get all of these organizations, which don’t actually produce anything of value other than rental fees, to use these tokens in their transactions with customers.

With the spread of network effects, the foundation foresees an integrated commercial grid for the exchange and conversion of these tokens (page 20). As the diagram on page 13 indicates, they have visions of consolidating the currency transactions of both groups - their clients and the customers of their clients. As profits are generated, the surplus capital in token sales to these rentier groups and their customers is reinvested in expanding the token community through its companies and their projects (pages 24-25).

Where is this value actually created? From the rental fees, paid in tokens, for the goods and services offered by the foundation’s clients. For the use of these tokens, the organizers are claiming a portion of the rent charged by their clients to the public. This does not transform the structure of the economy: the practice of rental fees continues in the token community, just as it does now in the sovereign commodity-money community.

So what’s missing here? First and foremost, there is no connection between monetary value and the thermodynamic systems which are the real driving factor in all production, distribution and waste in society; but, for CTE, currency value arises mainly from the rent-seekers who support the clients of the foundation. Frankly, this is even more predatory than the present Central Banking system, which at least nominally place emphasis on actual commodity value (and hence Nature) and productivity (hence Human Labor), even though these are wildly miscalculated and misaligned (as Central Banks, too, have gravitated heavily to the financialization side of the ledger in recent decades). But CTE doesn’t even pretend to connect with available resources and population needs. In confusing finance with monetary policy, the technocratic CTE proposal leaves out: the integration of greater ecosystems; commons; ecology; renewable and non-renewable resources; sustainability; the basic needs of people; and the political and social systems in which all of these operate.

A good example of this disconnect is Burke’s reference to using demurrage through smart tokens (page 21) without really understanding what the principle of demurrage is meant to accomplish: which is to slow down the entropic throughput the economic system. But rather than understand this as a transfer of energy from one state to another, Burke has no clue on how this operates. CTE’s clients are rewarded by spending their tokens as quickly as possible by ensuring that these tokens retain their value. There is no evidence presented that, in guaranteeing that these tokens will lose value over time, they will be creating syntropy (neg-entropy); rather, this appears to be a way that the foundation will use to generate marginal revenue for itself or to pay small taxes for its clients, and thus build greater network effects.

Yet, penalizing people for the non-use of tokens is not much different to the conventional system now, which continues to flirt with negative interest rates. Moreover, Burke seems completely oblivious to monetary fluctuations occurring now in the global economy. Be assured that when there is a downturn in the economy, customers will stop using these utopian tokens. This form of money (which is not actually money, but an financial investment in a worthless token) cannot survive as an option when the market collapses. People will not be able to afford to rent goods and services to meet their secondary wants and needs when their priority becomes obtaining goods and services to meet their fundamental needs in the primary markets. The rental market in goods and services offered by the ‘sharing economy’ will collapse. Thermodynamics assures that.

This white paper provides observations from the perspective of a blockchain startup eager to succeed. It offers worthwhile information about the field of ICOs, and makes lots of good observations about business management, along with breathless comments about the fortunes to be made in the fledgling industry. Yet, quite honestly, this is a dazed and confused project — an unabashed appeal to VCs which uses language from the digital counterculture to make it sound lucrative and sexy. The subtext is monopoly.

To me, probably the worst terrifying is that Jamie Burke ardently believes what he’s saying, indicating the same inverted epistemology that we have become used to under neo-liberalism: the cornering of more and more commons for private gain. But what about the claims of decentralization? Burke defines decentralization as choosing the middle path on a spectrum between the governing extremes of the ‘core protocol layer’ of the tokens (similar to the reserve asset base in conventional monetary systems) and the personal interests of community members (like the monetary board of governors in conventional monetary systems) (pages 37-39). This is not a picture of economic decentralization in society. Nor does the diagram of the foundation’s governance structure shown on page 40 indicate any decentralized checks and balances in the voting procedures of the organization itself. This does not even represent a ‘decentralized system’ as it applies within the CTE organization!

The diagram on page 44 is in the same vein: this is a structure for the financialization of a token which has little or no value, entirely unrelated to the value of the people and resources which underpin the transactions which the token is supposed to represent. None of this indicates a decentralization of economic power or decision-making in society, the way that the concept of decentralization is generally applied. Sadly, this whole scheme is even more disconnected from reality than the current model of Central Banking.

To financialize open source dynamics is a complete misunderstanding of what open source actually means — or at least how it could be used for the common good. Here, tokenized open source projects are designed simply to gain network effects that will crowd out competitors for the same open source space, with the goal of generating profit for investors through the product of tokens. Little different from the path of Amazon, Facebook, Google or the many other platforms that are created for purposes of network consolidation. Whatever happened to the idea of using decentralized network effects to mutualize benefit for everyone in the community?

So, again, what is Jamie’s Burke’s ‘community’? The author claims that through the adoption of his product, “token economies are community-financed and community-built initiatives, whose mission is generally to remove centralized monopolies and create more equitable systems”. Yet this premise is entirely based on the new approach of Web 3.0, where machine learning and AI will decrease hierarchical centralization. Is this equitable decentralization likely to happen when technology is presently being used primarily for the generation of monopolies, and mainstream cultural norms and practices are now moving toward more centralized control and less democracy? Is this equitable decentralization likely to happen when there is no attention whatsoever given in this white paper to grassroots decision-making in how this product can best benefit them, rather than accrue to the diverse players in the investor community who tokenize this product with value for their own gain?" (September 2017)