Tokenology: Moving beyond ‘tokenomics’

Guy Wuollet

“Tokens” are a hot-button topic for those in crypto and web3. Even beyond web3, tokens are capturing mindshare from anyone interested in art, cryptography, design, economics, gaming, math, psychology, and more.

Tokens have been described as everything from a “breakthrough in open network design” to a “new digital primitive” (analogous to the website). We can generally define tokens “as an internet-native unit of value”. But here’s the key point: tokens represent not just monetary value, but also social, reputational, and so on. There are many forms of value.

Tokens represent multidimensional value; they are a vector, not a scalar. Borrowing from mathematical notation, scalars have only magnitude — vectors have both magnitude and direction. A specific token can represent ownership, membership, identity, and more. Crucially, tokens matter because they allow builders to keep the high-dimensionality inherent in any representation of value, and thus open up a rich new design space.

This is also why I believe the term “tokenomics” — for describing the study and design of tokens — is very limited and inherently constraining. It fails to capture and convey the full dimensionality of that rich design space. Tokens can be used to coordinate and organize people not only within, but beyond, a purely economic context.

Token design is still in a nascent phase, so reducing the dimensionality of tokens to a purely economic context limits what’s possible to build here. That’s why I think we need another term. I propose “Tokenology”, designating “the study” — of how to coordinate people, organizations, and/or computation towards a common goal — primarily through the use of cryptography and mechanism design.

But first, a bit more about what tokens are, and why they matter

To put tokens in the broader context of blockchains & crypto: Blockchains are a new computational paradigm that have created a novel way to organize people, societies, and capital. Two key benefits of blockchains are composability and tokens. Here, I’m focusing on tokens.

The terms people use in the crypto industry also include “token model”, “token mechanism”, or “token design” (we use that last one, too; see here). But they all refer to how a token interacts with an associated protocol, system, or mechanism. For example: Ethereum’s token model specifies how ether works in the protocol; the token model is a subset of the protocol as a whole.

So, more concretely, how can we use tokens? There are many ways, but to summarize a few current use cases, we can use tokens:

For ownership. Blockchains are the first way to launch user-owned-and-operated open source services at scale; Ethereum is an excellent example of a user-owned-and-operated “world computer”. Tokens also give users digital “property rights”, which is another important concept here. Finally, tokens allow for the ownership of hyperstructures, defined as “crypto protocols that can run for free and forever, without maintenance, interruption or intermediaries.” In this context, they would also create value that is accessible and destructible by the owners; but that value need not be monetary only and can be extremely valuable in other ways.

For alignment. Creator coins, social tokens, and NFTs allow fans to directly interact with the artists they love the most, and to prove their fandom — whether as an early adopter, to show intensity of support, or for community and meaning. Dogecoin’s strength, for instance, is the meme, community, and “religion” it represents. Tokens can also be extended to not only represent membership in this community, but to establish a digital cultural identity; in this context, holders of such tokens can also vote on creative decisions in decentralized collaboration between creator and community.

For incentive structures. Incentive design has often been described as the key to understanding and motivating human behavior, but it can also align systems, organizations, and networks. Tokens help coordinate validators and miners in Ethereum and Bitcoin, respectively. They also enable decentralized governance in DeFi protocols like Uniswap, Compound, and others. Tokens can assist in membership growth and derivative creation for NFT projects like BAYC or digitally native DAOs and communities like FWB.

For accessing goods and services. Smart contract platforms like Ethereum sell the service of computation; Helium allows anyone to purchase LoRaWAN and 5G transit; and Filecoin allows anyone to pay for data storage… to name just a few examples. Many NFTs are also used to “gate” digital and physical experiences. Token gating can be used to prioritize early, or more active community members, or via other criteria as a way to distinguish between casual and more dedicated participants and to ensure a richer experience overall.

This list of use cases for tokens is nowhere near a comprehensive list, of course; it’s still just the beginning. But as you can see, this is an extremely rich design space — and slices across the arts, economics, and much, much more.

The case for a new term

Tokens clearly matter — and not just to the crypto industry, but beyond. Once they are combined with the other key feature and benefit of blockchains — that of composability — then one can really understand more deeply how the direction, and not just the magnitude, tokens can represent so much more.

Tokens, again, represent value as a vector, not a scalar. It is only when we recognize tokens as the native way of representing value vectors that one can begin to convey the rich design space here.

“Value” is an abstraction and most folks conflate “value” and “money”. Tokens let you make value explicit without being money. I’d argue that because the modern western economy denominates value almost entirely in U.S. dollars, it loses information by reducing a high-dimensionality vector into a scalar. For the most part today value is either 1) implicit, or 2) only explicit in the form of U.S. dollars. Value can be represented in several other ways, including around the U.S. dollar. All interactions actually transfer value, most easily seen in the form of time and information.

The key is developers should be able to make implicit value explicit using a new token design.

So whether we call it “Tokenology” as I suggest here, simply drawing on the study of tokens; or something else — I’m curious for what you’d propose as an alternative as well! — we need to move beyond just tokenomics = tokens + economics. It’s tokenology = tokens x economics x art x …. A new term may also help us usher in a new and richer era of token design as well.


editors: Sonal Chokshi, Steph Zinn

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