TOKEN ECONOMY — just released

As for the current volume I would like to share a few thoughts: Criticism can be hard to take, and this is certainly also true for me. But still, it was the feedback from my most critical readers which turned out to be the most useful in identifying where my analysis was missing depth, especially regarding this volume in the Token Economy Series.

When I first read the negative review that motivated me to rewrite the “Money” chapter, I doubted myself and wanted to throw in the towel. At that point I was exhausted by the scope of amendments that I realized where necessary — and why I eventually decided to release the new edition as three separate volumes. More than two years had passed since I had finalized the previous edition of the book, which was slightly before the first DeFi boom and bust cycle, so there was much new territory to cover about the rapidly emerging DeFi space.

At this point in my writing process, reading a relatively extensive and critical review on the previous edition of the book blocked me even more. After a while however, I realized that the review was not so negative after all. I was just thrown off by the tone of the review, which I perceived as angry. Then it occurred to me that this anger might also be rooted in disappointment — maybe my book had just failed to give that particular reader the information they had been looking for.

This realization gave me the renewed perspective and stamina to deal with the challenge of making the extensive changes and amendments which were necessary for this third edition. I also realized that I needed to start by rewriting one of the most important chapters in the whole book — the chapter on money. This one particular critical reviewer helped me understand that I was conveying a very narrow perspective of money, even though my intention in writing the book was quite the opposite. I further realized that the history of money and the history of credit are deeply intertwined and cannot be told separately from one another, which is why I changed the chapter title to “Money & Credit.”

As money has become an increasingly native feature of the Internet, easily programmable with a few lines of code, the chapter on money and credit is a cornerstone to understanding the scope of tokenization and the different shapes in which money can potentially be deployed and used, including the financial applications that build on top on these new forms of money. The general question that this volume of the Token Economy Series tries to answer is: How will tokenization impact not only our monetary systems, but also our financial systems and the real economy and can so-called cryptocurrencies and other tokenized assets replace money as we know it?

In public debate, these questions usually lead to highly contentious discussions and the arguments very often depend on one’s definition of what actually constitutes money. Discussions about what “real” money is often seem to have an almost religious dimension, where arguments are based on ideology or semi-knowledge.

One of the greatest challenges for understanding the impact of Web3 and tokenization is that financial literacy is not taught in most schools across the globe. Most students who finish high school and even college have little to no idea what money is, where it comes from, and how financial markets work. The lack of financial literacy creates considerable information asymmetries when it comes to making sound financial decisions, and might be one of the reasons why retail investors with little financial experience are more prone to being scammed by malicious actors. Unfortunately, the history of financial markets is full of such examples, and it is no different in crypto. How can people make wise investment decisions if financial literacy is so often insufficient or even non-existent, even among those who work in the banking sector? While I believe that financial market regulation plays an important role in customer protection, the first step should be breaking the cycle of ignorance and introducing financial literacy classes for children from a relatively young age, and making sure that even those who do not finish high school have access to this information.

Having studied business administration at Vienna University of Economics, I graduated from college in 1998 without really understanding what money is or where it comes from. While we were taught certain aspects of money in some economics classes, such as the different classifications of government issued money (M1, M2, M3, etc.), I was clueless about the history of money, the different types of money, or the fact that modern fiat money is in fact not printed or coined, but predominantly created by private banks via the issuance of credit. International friends and acquaintances, who also graduated from business and economics schools across the globe, seem to have had similar experiences. The level of financial literacy I have today is almost entirely based on personal research and everything I learned over the last two decades, and only marginally based on what I studied at university 30 years ago. My self-taught financial literacy has grown exponentially ever since I had to wrap my head around Bitcoin, Web3 and tokenization.

The overall lack of financial literacy in the general population also impacts how media outlets cover the topic of Bitcoin, Web3 and its applications. Over the scope of my career I have given hundreds of interviews to journalists, often from traditional media outlets. The experience was mostly frustrating, because in order to be able to explain Web3 and its tokenized applications, I not only have to explain how the Internet works before I can explain Web3, I also have to explain what money is before I can get into the actual questions around “cryptocurrencies.” There is usually not enough time to do this, and even when there is, only a negligible part of what I say gets printed or quoted by traditional media outlets. The intention of this book is, therefore, to give an overview of the concept of money and credit, including the history, types and functions of money before we deep-dive into different use cases of tokenized currencies, tokenized commodities, and a range of tokenized assets of the digital and real economy — that may or may not include inbuilt stability mechanisms, and may or may not be fungible.

This book will first introduce core concepts of tokenization, before delving into the question of what constitutes money and credit. Both chapters provide an important foundation from which we can then analyze various use cases for fungible and non-fungible tokens that represent different types of assets. Later chapters will introduce the concepts of financial markets and analyze how asset tokens can be used as collateral in a growing ecosystem of tokenized financial applications — ranging from DeFi (Decentralized Finance) to CeFi (Centralized Finance).

Tokens that are designed to incentivize an autonomous group of people to individually contribute to a collective goal, and are minted upon proof of a certain behavior, will be the subject of the next book titled: “DAOs & Purpose-Driven Tokens.” (expected publication June 2023).

The technical and political aspects of blockchain networks and core Web3 infrastructure will be discussed in another book of the Token Economy Series titled “Web3 Infrastructure.” (expected publication Oct 2023)