What Is the Token Economy?

Chapter 3. Tokens: The Future of Money?

The biggest challenge that we face when we try to explain or talk about cryptographic tokens is that we are trying to explain new phenomena with old terminology. Using old terminology to explain new phenomena does not do justice to the full range of possibilities this new technology has to offer. Although it is understandable that we tend to look for analogies, we need to be more precise. So that we are able to draw similarities and make accurate distinctions, it is therefore important to understand the historic evolution of money as well as the purpose and functionalities of money.

In a market economy based on division of labor, the role of money issued by governmental bodies is to facilitate the exchange of goods and services. It makes economic exchange much more efficient than gift economies and barter economies, avoiding the inefficiencies of such systems, like the coincidence-of-wants problem. The coincidence-of-wants problem refers to the improbability that two parties—each owning different goods—can agree on a deal unless each party wants the specific good the other party offers at the same time. To mitigate this problem, we can agree on a universal asset of value as a medium of exchange.

Functions and Properties of Money

Shells, precious metals, and livestock were first used as such assets to counter the inefficiencies of a barter economy. Over time, however, more neutral artificial mediums of exchange developed, which we began ...