🌍 Intro
🌇 First and foremost. I would like to give a shout-out to [1] The Systems Innovation Network (SiNetwork) for providing such excellent educational content as well as providing an excellent resource for those designing and developing complex systems. Their course on Tokenomics has become the basis for my knowledge and understanding of the fledgling world of Tokenomics and Token Engineering, and the first source I reference when studying new applications.
🧾 Table Of Contents
Abstract
Designing and building token economies is a fledgling field that has captured my interest and time for both my writing and research, prior to and after my time working within and supporting web3.0 startups in the past as a Product Manager– To continue the practice of writing and research on the subject, I will be sharing a multi-post series covering tokenomics and token-engineering.
In this post, we will focus on two key pillars of token economies, Ledgers and Accounting principles. My objective is not to qualify or disprove a belief around the effectiveness of blockchain and cryptocurrencies, the objective is purely research-based, per se, an opportunity to look at this new discipline, tokenomics, and token economies from a system design perspective. I will not be calling out specific use cases for token economies and tokenomics design, such as GameFi or Decentralized Finance (DeFi) in this post, but will cover these areas and the role of token-design within these groups of projects in later posts.
Keywords:
Tokenomics; Economics; Decentralized Ledger; Accounting; Currency; Cryptography
My Goals for this post:
1. I will discuss the reasons for writing this post, and my recent work on the Industrial Revolutions, as well as provide historical context for the rise of tokenomics and cryptocurrencies
2. Describe how ledgers were designed and implemented in pre- and post-industrial societies
3. Examine the accounting philosophies, from single-entry to triple-entry, and the implications of cryptographic accounting
Motivation
Leading up to this series, I spent the past month researching and writing about each industrial revolution, from 1IR (The 1st Industrial Revolution) to the 4th. 1IR and 2IR were both covered in part 1 and part 2 will cover 3-4IRs. This was not by accident, the goal of the IR series was to provide sufficient research and historical references that eventually lead to my work covering the innovations and technologies of the post-industrial era such as decentralized ledgers and blockchains. Part 2 of the IR series is still a WIP but I will make sure to push it live after this post, or potentially after one more follow-up post, TBD. Engagement and other metrics will ultimately determine what I post about in direct succession to this post.
Tokenomics Overview and Historical Context
In the 1990s, industries were transformed by the introduction of the internet and digital-age products and services, often referred to as web2.0 or the information age–January 3rd, 2009 is the singularity, the day Satoshi Nakamoto released the [2] Bitcoin White-paper, A Peer-to-Peer Electronic Cash System, single handily introducing a new paradigm of monetary policy that would eventually lead to a complete disruption of legacy banking and financial technology companies alike. A system that was seemingly more democratic and less prone to human error. With this, came web3.0, or the evolution of industry based on tokenization and decentralized ledger technology. The 2008 financial crisis was the leading cause for the creation of the Bitcoin whitepaper and subsequent layer-1 and layer-2 protocols, which I covered in detail in my post titled, Fintech: How the Tech Industry Is changing Finance.
The objective was to build a new financial system that was decentralized, utilizing an immutable ledger to record all transactions, both past, and present. Bitcoin was proposed as a way to optimize for a broken centralized banking system that almost lead to the downfall of the world economy as a direct result of financial globalization and the contagion brought on by the sub-prime lending market and debt crisis of 2008. Cryptographers have been entertaining and theorizing about a peer-to-peer digital cash system since the 1980s.
[3] In 1983, David Chaum created eCash, the first Cryptocurrency in which two users could transact with a tokenized currency devoid of any intermediary, anonymously and securely. After eCash, Chaum started DigiCash to bring the first cryptographic-money system to market. In 1998 DigiCash went bankrupt, though many of the core principles employed in the design of DigiCash and eCash laid the foundation for BitCoin and each of the subsequent layer-1 and Layer-2 networks that went live in succession to Bitcoin such as Ethereum, Near, and Solana. The latter 2 are the most late-stage examples when compared to the incumbent networks.
The value of a Decentralized Ledger
The concept of ownership is foundational to economics–Many governments and private institutions have created procedures to ensure property rights of various asset types, or for information, itself. [1] Who owns what is critical to the security of modern economic and social systems? Why yes, naturally!; All stores of value within an advanced economy are recorded in a ledger, either public or private. The ledger acts as the gatekeeper, determining who can access and utilize the data. In our current system, we put our trust in both the judicial system and government to act as the central point of reference within this system of value.
Because these centralized ledgers are being maintained by the government and judicial system, the network, by design, can neither be updated, accessed, or modified without explicit rights granted or entrusted by the governing body, which is entirely gated and siloed by delineation.
Some examples are Central Banks, Private banks, Private companies, Education-Institutions, and Hospitals, to raise the largest and most powerful centralized authoritative examples within our current system. They hold our right to modify entries in these databases persistently (create, read, update, and delete), therefore, maintain all of the economic power within our current system. Net resources can also be measured as, dollars or, any other economic store of value( gold, silver, commodities, etc).
The value proposition for decentralized ledger and database technologies is the mere fact that within a blockchain network, each end user can connect directly to the ledger, therefore, the centralized authoritative governments, judicial systems, and organizations, no longer maintain all of the power– This new system-of-industry is more democratic and represents a freer market of commerce and business. A blockchain by design is an immutable ledger of all transactions, for the existence of that protocol.
In the most basic sense, a ledger is the accounting of a transaction (either financial or not) that is structured using predefined logic for the schema or the makeup of the database itself–ultimately ledgers determine ownership. Beyond ownership, ledgers can be viewed as a way to validate or confirm identity, status, and authority. [1] “ At thier most fundamental level, ledgers map economic and social relationships” – It is the basis of the current financial system and market capitalism that all parties involved have some degree of trust in the system.
Systems of Accounting, history & design
As we move from the centralized industrial age to the decentralized post-industrial digital age, how we design economic exchange has become increasingly important. With token networks, we can now redesign the preexisting monetary and fiscal systems to account for ownership, identity, status, and authority.
Economies were purely physical in early civilizations, as barter systems were used to conduct trade. Transactions were kept in a running ledger that was effectively a list of all transactions. To track ownership through ledgers, which formed a database of transactions, economies in the industrial age stored value using paper and paper-based systems. In this era, economies switched from a single-entry to a double-entry accounting system. In the digital age of economic development, economies needed to convert economic stores of value into digital in the form of 1s and 0s, a practice that has continued until current-day classified as digital transformation. In the post-industrial age, the stores of value will be ported to decentralized ledger/blockchain networks.
The modern-day system of accounting can be traced back to Luca Pacioli’s work, published in his magnum opus, Summa de Arithmetica, in which he conceived of the first double-entry accounting system.[4] In both the pre-industrial and post-industrial ages, this system laid the basis for all modern accounting techniques leading way for the Triple-entry system of accounting which solved the core design errors of the Double-entry system, where all transactions were stored in 3 places rather than 2 ( 2 parties associated with the transaction and a 3rd independent variable).
Within this system, there will always be multiple records available for any individual transaction. A system in which decentralized ledger and blockchain technologies require and are designed to achieve. Within a blockchain network, the creation of a single entry when using this method of accounting would be represented by a cryptographic hash, containing all of the information associated with the transaction as we reviewed earlier in this paragraph, validated by every node within the network to achieve security.
Conclusion
Pointing back to the singularity– January 9th, 2009, and the creation of Bitcoin through Satoshi Nakamoto’s Bitcoin white paper. We saw the first practical application of this new cryptographic accounting system that was theorized almost 20 years prior through early research employing cryptography for payment processing and accounting.
When we as a society look back to reflect on the most impactful innovations and creations of the post-industrial era, I believe it’s more likely than not that the introduction of Triple-entry accounting as it’s applied in the world of the decentralized ledger and blockchain technology will become recognized as the catalyst.
Thank you for taking the time to read through my Tokenomics post, your time is of great value to me and I hope to post the highest-possible, quality content. This blog is still in its infancy, I will continue to test content, layouts, design, etc, as I work towards creating a more standardized template for each subsequent post.
References
- [1] https://www.systemsinnovation.network/posts/token-economies-a-short-guide
- [2] https://bitcoin.org/bitcoin.pdf
- [3] David Chaum-ECash - https://chaum.com/wp-content/uploads/2022/01/01-06-95-Ecash-Trial-is-Now-Worldwide.pdf
- [4] David Chaum-DigiCash -https://chaum.com/wp-content/uploads/2022/01/02-14-95-DigiCash-announces-cost-breakthrough-in-secure-chip-technology-for-smart-cards.pdf
- [5] https://onlinedegrees.und.edu/blog/triple-entry-accounting-blockchain/
- [6] SI Network Tokenomics course source: youtube
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