Why Token Economics is different from Economics 101

Token Economics.

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TLDR below. This is not financial advice.

General Conclusion

Traditionally, economics is the study of how resources are produced, consumed and distributed in a market. Resources are input factors to produce goods or services for commerce. They are factors of production. There are four main resources: labour, land, capital and entrepreneurship.

Economics is a “soft science” like psychology, political science and sociology, compared to a “hard science” like physics, biology and astronomy. As our ecosystems evolve due to technological upgrades and increased complexity of human behaviours, the analysis and objectivity in economics evolves with resource evolution.

The advent of new economic resources like information as a resource, and technology allowing for interaction between agents, has resulted in new economic fields. Many of the recent Nobel prizes were awarded in recognition of new economic approaches. For example, auction theory (2020), integrating technological innovations into long-run macroeconomic analysis (2018), nudge theory and choice architecture (2017), contract theory (2016), two-sided markets (2014), and market design (2012).

New Economic Resource: Intangible assets

The four traditional economic resources are land, labour, capital, entrepreneurship. These are traditional tangible resources.

In today’s digital ecosystems, a new resource has come into the picture: information (intangible resource).

4 Properties of this new resource

Sunk costs: these are costs that have already been paid for and consumed.

Spill-overs:

these are additional effects that can be both positive and negative. This is determined by the secondary impacts and implications related to the intangible assets created.

Scalability:

this is the ability to expand growth easily. The key feature in an intangible asset is that it has a non-rivalry characteristic. One person’s usage does not reduce the existence of the asset. The asset is also supercharged with “network effects”, a positive spill-over.

Two people in two cities can read the same article online at the same time. This is different to an article in a newspaper, where only one person at a time can read the newspaper because they are each in different physical places.

Synergies and complementarities: these are intangible assets that can produce synergies and complementarities with other assets, enhancing network effects. This helps networks to scale and produce positive spill-over effects, as opposed to substitutability.

Information as a Public Good

Information is different from classical physical goods in a few aspects. Information can be consumed by two or more people at the same time and they are nonrivals in consumption. This means that there is almost no opportunity cost when it comes to consumption.

For example, you can read an article on BBC and another person can do that at the same time. But if you head to the library and want to read a physical newspaper, you have to wait for the other person to finish reading before you can borrow it and read it.

Considering the above, it becomes difficult to estimate demand for information goods. Hence, we estimate demand with data or use proxies to estimate this.

For example, we track how many people are on that BBC webpage to understand how many people demand the specific information that article provides. Or we use proxies to estimate, such as trending topics on Twitter, Google, Facebook. Trends suggest rate of demand for particular information.

Examples of information markets: insurance, education, marriage market.

Token Based Economics

We are building the future today. Economics is needed to understand the factors that affect, define and govern the ecosystem. As we move towards digitisation, an information economy, and the rise in intellectual property (ideas, knowledge, research, open-sourced protocols, algorithms, data), we are shifting the way our economy works.

The information economy will continue to flourish and grow, but there is a new contender in the space: decentralised digital economies. With the digital space moving into decentralised organisations, new issues, variables and problems arise, resulting in decentralised digital economies.

One key challenge is to coordinate decentralised organisations. This is difficult, because everyone has different incentives, objectives and preferences. How can we align them? How can we coordinate agreement between such organisations? These are some of the problems we aim to solve with economics and tokens.

Technology has changed the way economic principles are being applied. The good news is that fundamental economic principles do not change.

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TLDR:

As markets evolve, the economics governing the markets also evolve. Markets evolve due to technological advancements and new types of resources creation. Intangible resources are a new resource in the space today. Supported by technological advancements, these developments have reshaped the way we understand how markets work and can be designed.

Get smart: Technology has changed the way economic principles are being applied. The good news is that fundamental economic principles do not change. We just have a new resource to play with now.