Content written on the basis of the keynote speech by Enrico Ferro, Head of Strategic Advisory at Links Foundation, during the Tribe by ToTeM event on April 4, 2023.

In recent years, the rise of cryptocurrencies has captured the attention of many. However, beyond digital currencies such as Bitcoin and Ethereum, an even broader and more powerful concept is developing: the token economy. The token economy is a new form of digital economy that harnesses the potential of tokens to create a virtuous, decentralized ecosystem. In this article, we will explore the concept of token economy, its benefits, and its possible applications in various sectors.

By now, the Internet has completely changed our lives for more than two decades and has been experiencing increasingly rapid acceleration in recent times. The "contemporary" web has confronted us with the issue of digital scarcity and the consequent rise of the Internet of value. Therefore, it became necessary to overcome the demonetization and commodification of digital goods, whose exponential ease of reproduction and duplication had drastically reduced their value. According to this logic, the introduction of the concept of digital scarcity is a foundational aspect of the new digital economy based on liquid, divisible and borderless digital goods. Thus the concept of the token economy was born.

We talked about this during the event Tribe by ToTeM held last month with Enrico Ferro of Links Foundation. The foundation, in recent years, has been working on the launch of the project Over The Block: the initiative, led by a multidisciplinary team headed by Ferro, aims to raise awareness of the opportunities offered by exponential technologies by highlighting their ability to revolutionize businesses and society.

What is the token economy?

The token economy is an economic system based on the use of tokens, digital units that represent a specific value or utility within an ecosystem. Unlike traditional currencies, tokens are built on a blockchain, a technology that ensures transparency, security and immutability of transactions.

Theinternet of value is based on three fundamental pillars enabled by blockchain technology:

• Distributed ledgersystem of digital records shared in a network that leverages secure encryption, authentication and consensus protocols;
• Smart contracts: allow anything of value (money, property, shares) to be exchanged transparently and seamlessly without the need for an intermediary;
• Token: digital unit that encapsulates any kind of exchangeable value.

The token economy aims to create an environment in which tokens act as an incentive to encourage desired behaviors and promote interaction among users.

How does the token economy work?

In the context of the token economy, tokens can be used in various ways. For example, they can be awarded to users as rewards for active participation or for achieving specific goals . Tokens can also be exchanged among users to purchase goods or services within the ecosystem. In addition, tokens can represent property rights, allowing users to own a share in a specific asset or participate in voting decisions.

We can distinguish some macro-types of tokens:

• Payment Token: digital currency pegged to state-guaranteed currencies;
• Digital Assett: represents assets such as a claim or share against the issuer;
• Utility Token: provides access to a service or product, sometimes with preferential terms;
• NFT: original digital content characterized by uniqueness and control of its replicability through blockchain validation.

Benefits of the token economy

The token economy offers several advantages over traditional economic systems. First, decentralization is one of the key pillars of the token economy. Because tokens are based on a decentralized blockchain, decision-making power and governance are distributed among users rather than concentrated in one central authority. This promotes greater transparency and reduces the possibility of fraud or manipulation.

Second, the token economy encourages user interaction and participation. The incentives provided by tokens encourage users to actively contribute to the ecosystem, such as by providing feedback, creating contents or sharing resources. This creates a virtuous circle in which users are rewarded for their contributions, further fueling growth and innovation in the ecosystem.

Specifically, the token economy:

• makes latent and intangible values traceable and exchangeable at the individual, social and corporate levels;
• lowers barriers to entry of capital income by creating new types of assets and new forms of capital ownership;
• makes ownership more accessible;
• helps increase liquidity and transparency;
• makes it possible to move value at the speed of information;
• can help bring nature into the economic equation.

Applications of the token economy

The token economy has the potential to be applied in various sectors. For example, in the financial sector, tokens can be used to simplify transactions and reduce brokerage costs. Financial institutions can issue tokens to represent securities, stocks or other financial instruments, allowing investors to purchase them directly without the intervention of intermediaries. This could make financial markets more accessible, efficient and transparent.

In the gaming and entertaining industry, the token economy can be used to create virtual ecosystems in which players can earn and exchange in-game tokens for virtual items, skills, or game experiences. This provides tangible value to gaming activities and can create new opportunities for game developers.

The token economy can also be applied in the areas of e-learning and online communities. For example, e-learning platforms can award tokens to students for completing courses or achieving specific milestones. These tokens can then be used for access to premium content or to unlock additional learning opportunities. In online communities, tokens can be used to reward active members and incentivize participation and the sharing of knowledge.

From a company's perspective tokens can be useful for:

• Marketing: they enable deeper relationships, lead to shared decisions and develop personalized experiences
• Innovation Management: they facilitate the initial stages of the diffusion process of a good or service
• Fundraising: they contribute to capital formation by working alongside equity and debt.

Conclusions

The token economy is revolutionizing the digital economy, offering new possibilities for incentives, participation and transparency. Through the use of tokens, it is possible to create virtual ecosystems that enable users to generate and exchange value from their digital activities. As the token economy continues to evolve, it is important to consider the challenges and opportunities it presentsin order to maximize its benefits and ensure that risks are properly managed.

Ultimately, the token economy paves the way for new forms of economic interaction and can play a significant role in shaping the digital future.

Are you interested in more content on this topic? Visit the Tokenomics section of the Over The Block blog.