Declaration of Token Economy

We herewith proclaim the independence of Korea and the liberty of the Korean people. This we proclaim to all the nations of the world in witness of human equality. This we proclaim to our descendents so that they may enjoy in perpetuity their inherent right to nationhood. [Translation: http://www.declarationproject.org/?p=1261]

1. Introduction

The above is the first paragraph of the Declaration of Korea Independence proclaimed on March 1, 1919. Today is the 99th anniversary. Korea was a Japanese colony nearly 35 years from 1910 to 1945. To resist against the loss of coercive sovereignty and the oppression of ruthless colonies by Japan, the 33 Korean racial representatives announced the statement to informed the world of Korea’s strong will for the independence and Korea didn’t want to be under Japanese rule any more. In celebration of the Independence Day, I am announcing this declaration with my will to the Token Economy. Declaration is very important in all things. Of course, you can act first without making one. But a declaration is the manifestation form in which the time of your consideration and preparation before you act.

Look at the British Bill of Rights (1689), which ended the royal era and opened the Parliamentary Republican era, the American Declaration of Independence (1776), which declared independence from the British colonial repression and the French Declaration of Human Rights (1789), which informed the start of the French Revolution! They all went through a process of extremely difficult wars and changes after the declaration. Of course, our country also endured and overcame the time of the long suffering with the Declaration of Independence in 1919 and until the liberation in 1945.

The global financial crisis triggered by Wall Street in the United States in 2007 and the quantitative easing as a solution increased the antipathy toward centralized currency issuance. As the resistance, the concept of Bitcoin, the originator of the cryptocurrency, was posted on bitcoin.org in a nine page paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ in October 2008 by Satoshi Nakamoto. (https://bitcoin.org/bitcoin.pdf) The genesis block of Bitcoin was introduced to the world in January 2009 by many volunteer developers who participated in Satoshi Nakamoto’s proposal in the paper.

Bitcoin did not come to the world with integrity from the beginning. There are still many problems, but without the declaration of 2008, there could be no Ethereum which is the second generation of cryptocurrency, a lot of cryptocurrency exchanges, blockchain technology development, and a lot of coins(tokens). At least, the emergence of cryptocurrency would have been delayed.

SO, DECLARATION IS COMMENCEMENT AND MOVEMENT.

Now I’d like to declare to the world that 2018 is the first year of the Token Economy and Korea is at the center of it.

2. Background of Token Economy

Every innovative idea or system begins with an idealism that seems impossible to realize at the beginning. Even now, the realization of tokenized world and token economy can also be seen as idealism. However, you will soon see that the idealism turns into realism in a very short time.

Definition of Token Economy The design of a token and the set of rules of the economic ecosystem where it will be used. The key idea is that through a design based on game theory and incentives, the use of the token becomes desirable by all stakeholders of the ecosystem: clients, suppliers and the sponsors of the token. (by Pablo Moreno de la Cova, The original link : https://blog.icofunding.com/tokens-and-tokenomics-the-magic-of-icos-a7a886ca323c)

Token Economy is called Token Economics, Tokenomics or Tokenized Economy. I suggest call it simply 'Token Economy' from now on.

Token Economy is to design rules between the tokens and the real economic system in which they are used, as defined by Pablo Moreno in October 2017. The key idea is based on game theory and incentive systems. All token ecosystem participants, including customers, suppliers and token supporters, should be willing to use it. In other words, it is an economic structure in which appropriate rewards are paid according to participation of all participants in the token ecosystem.

Let me think. Why is it impossible to realize in existing economic systems? Why is it possible only in the token economy? Before we answer these questions, we must understand the limitations of a centered market economy on a 400-year-old corporation and shareholder capitalism that we have been believed and supported.

Occurrence and Limitations of the Corporation

The most basic structure of the company is the corporation structure. Shareholders who raise capital by issuing stocks and invest in stocks are willing to earn a high level of profit from the company's growth because they invest with high risks at the beginning. The structure of the corporation which has made with the harmony of ‘Risk’ and ‘Return’ of humankind and with efficiently manners is fundamental to make capitalism and market economy grow and sustain.

To understand better, the origin of the corporation can be found at Dutch East India Company, founded in 1602. In 1600 the British East India Company was first established by merchants, in London, England and it was a joint-stock company. Otherwise, the Netherlands issued stocks and raised funds.

To monopolize trade with Asia with spices, woolen fabrics, and silver coins, the Dutch East India Company was established but it was a typical 'High Risk, High Return' business because they was able to make a profit after making a long distance round trip to Asia. It would be a huge financial burden and a highly risk for the merchants, if they were the only ones who paid the expense. Therefore, issuing a certificate of stock was designed to reduce investment risk by raising funds from the public. In this way, they could raise larger funds from the majority of people and they could be less burdensome by hedging the risks with the public who participated even if one or two merchant vessels sank into the storm. The names of shareholders who invested funds were list on the shareholders’ list. Bottom of the vessel was the list because they used to ‘write’ their names ‘under’ the vessel at the beginning so they called the shareholder ‘Underwriter’. It became the origin of the securities company. When the vessel returned, a large portion of earnings was distributed to the shareholders whose names were written at the bottom of the vessel. If the vessel did not return, the shareholder list with the ship was also lost so the shareholders suffered a great loss of investment.

The corporation has many advantages. Not only provided a framework for raising the funds required for high-risk business from shareholders, but also made compensation possible according to the risk. However, the gap of understanding of shareholders and management may cause a problem called ‘Agency Problem’. Also there could be various problems such as the shareholders' monopoly from the growth of the company, and the complaints of employees who provide the sweat equity about inappropriate compensation.

In terms of finance and accounting, the owner of the corporation is the shareholder. The shareholder's investment is entered in the capital category of balance sheet, and the performance(profit), as the results of the employee’s labor, is also added as the retained earnings in the capital category and it is distributed only to the shareholders.
Of course, we cannot deny that there are still problems in the structure of the corporation even though we have been tried to solve them by distributing a portion of the profits as an incentive to the employees or providing stock options. In other words, the corporation is not the economic system to solve the interests of all the market participants such as shareholders, customers, employees and any stakeholers who took part in the growth of the company.

The Emergence of Credit Cooperatives

Shareholder Capitalism has received many criticism, but it has also been recognized as the most efficient system. Even if capitalists are also aware of the problems, some insist ‘Stakeholder Capitalism’ like Ford, the automobile company by Henry Ford.

“There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.” by Henry Ford

A company is there to produce something, and pay people a wage high enough that they could become your customers. (http://nhlabornews.com/2013/11/stakeholder-capitalism-vs-shareholder-capitalism-how-workers-lost-everything/)

However, Stakeholder Capitalism cannot satisfy all market participants. In particular, platform companies such as Facebook, Uber, and Airbnb, which have grown into user-based companies, could not properly distribute their profits appropriately to everyone who produce contents, drives cars, and lends their homes. There is still a middleman, and a high commission should be paid. The credit union is giving an idea to solve this problem.

A credit union is a member-owned financial cooperative, controlled by its members and operated on the principle of people helping people, providing its members credit at competitive rates as well as other financial services. By Wikipedia(https://en.wikipedia.org/wiki/Credit_union)

Credit cooperatives are financial associations owned by ‘members’ and operated on a principle of helping each other. They provide loans and various financial services to their members with competitive prices. It is a form of ideological socialism (Utopia Socialism) that emerged from the gap of socialism as a reaction to the rising problems of capitalism as a result of the rapid capitalization during the Industrial Revolution in the 18th century.

The Cooperative Principles published by the International Cooperative Federation (ICA) can help you understand the basic principles and the spirit of cooperative operation.

[7 Cooperatives Principles]

Principle #1 : Voluntary and open membership Cooperative members can enroll and withdraw.
Principle #2 : Democratic member control / Cooperatives give equal rights to their members. One member can vote once. Unlike shareholders who could have votes according to their stocks, one member has one vote.
Principle #3 : Member economic participation / Cooperatives encourage economic participation and prohibit discrimination based on religious, political beliefs and gender.
Principle #4 : Autonomy and independence / Cooperatives follow autonomous control and self-help by their members and exclude external interference.
Principle #5 : Education, training and information / Cooperatives provide education and training for members and also give informations as much as possible. It is also possible to disclose it to non-members.
Principle #6 : Cooperation among cooperatives / Cooperatives cooperate preferentially with other cooperatives, individuals and businesses.
Principle #7 : Concern for community / Cooperatives contribute to their society to solve the problems of hunger, environment and unemployment, etc.

The principles mentioned above provide ideas to solve the problems of shareholder capitalism. These ideas will be combined with cryptocurrency to create a new form of organization and a new reward system.

3. Blockchain, Cryptocurrency, ICO: Things what Token Economy Possible

Shareholder centered corporation has a history of 400 more years. Reformation through socialism and innovation through credit cooperatives did not overcome the problems of shareholder capitalism. Now the possibility begins to appear slowly. The blockchain technology, issuing cryptocurrency and financing(ICO) has made the token economy possible and has enabled systems that have not been dreamed before.

Blockchain Technology

A blockchain, originally block chain, is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a cryptographic hash of the previous block, a timestamp and transaction data. By design, a blockchain is inherently resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties and in a verifiable and permanent way". For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority. (By Wikipedia : https://en.wikipedia.org/wiki/Blockchain )

This blockchain technique was developed in 1991 by Stuart News and W. Scott in the concept of an encrypted security blockchain, and in 1992 it was able to store multiple information into a single block in a merkle-tree structure. In 2002, the concept of decentralization was added by David Mazières and Dennis Shasha. It extended to the development of the ‘Proof of Work’ and ‘Timestamping’ (digital timestamping of a series of events) in 2005 by Nick Szabo who proposed a decentralized digital currency 'bit gold'. Even though Nick's 'bit gold' was not realizable, he was a pioneer in the basic Bitcoin architecture of Satoshi Nakamoto in 2008.

Through these technological advances, the blockchain technology was not centralized but decentralized, and it was impossible to forge and falsify due to encryption and irreversibility, and it enabled a lot of computation processing at relatively low cost. And all the information was stored in the public blockchain so that transparency could be ensured.

The development of concept-oriented papers and concepts emerge as products or services in the real world by geniuses who recognize them. The blockchain technology was realized in 2008 by Nakamoto Satoshi as a Bitcoin. The Blockchain Revolution began.

Cryptocurrency

Traditionally, currency was issued and controlled by the central government. Since the dollar issued by the gold standard was abolished in 1971, the value of the money after that was maintained with the credibility of the central bank issuance, and has continued without the collapse of great trust to date. However, the global financial crisis in 2008 and the indiscriminate issuing dollars in order to solve the crisis have brought tremendous resistance from the people. It took a huge amount of national tax to save the main culprits of the financial crisis, and the survived financial institutions had a bonus feast. The ‘Occupy Wall Street’, which was the result of this, showed the oppression of the people.

There have been people who have shown such aversion to the digital world since the late 1980s, and these people are called Cypherpunk. They support the widespread use of strong encryption and personal information protection technologies as a path of social and political change. They shout decentralization and dream of a world of strong encryption and want privacy to be protected.

These two atmosphere were combined and conceptually summarized by Satoshi Nakamoto in his paper, and Bitcoin, the first cryptocurrency in world history, was born in early 2009.

Who has the right to issue currency? The central bank was the only one before Bitcoin issued. However, the emergence of the problem of decentralized currency, the development of technology such as blockchain, cryptocurrency and so forth, have led to the denial of the centralized society and the issue of decentralized digital currency. This is a truly remarkable change and a stunning revolution. Now, anyone can issue money as a method of storing and exchanging value. Cryptocurrency could be real if we have enough people who trust in it.

The fact that the public has the right to issue currency means that the public can use the functions of money, such as a measure of value, means of exchange, means of payment, and value storage. Therefore making new forms of commerce, investment, finance, and corporate structure are possible. By issuing digitized currency, you maximize your digital attributes and open up a new world you've never experienced before.

Bitcoin, the first generation cryptocurrency was the mean of payment. Ethereum, the second generation cryptocurrency showed the possibility of platform by combining smart contract concept. Now cryptocurrency is evolving into third-generation with the speed of processing and various functions. Cryptocurrency has grown explosively since the money has traded in the cryptocurrency exchange market like the stock market. With the opening of the Bitcoin Exchange market in February 2010, it became possible to buy and sell cryptocurrency. With the opening of KORBIT(https://www.korbit.co.kr) in Korea in April 2013, it has become possible to trade in Cryptocurrency in Korea too, and as of March 2018, the number of transactions in domestic exchanges has increased to the top of the world transaction amount and grown into a big market. Today, the daily trading volume of Korea exchange is close to tons of billion dollars and the kinds of cryptocurrency are more than one hundred.

The emergence of the exchange market after the cryptocurrency has provided liquidity and value to the cryptocurrency, and created a synergy effect and faster growth has been enabled. The public also has the opportunity to participate in the cryptocurrency and reclaim the funds.

ICO

As the company grows, it may be listed on the stock market to grow a bigger company. It is called Initial Public Offering (IPO) because it gives the public an opportunity to buy stocks of the company for the first time. By doing this, the public can buy stocks, get the profit trough trading, and the company can attract a lot of funds from the public.

The development of the stock exchange enabled the securitization of the invested stocks and made it easier to raise funds from the market. The development of stocks is not possible only by the stock itself, but by the presence of investors, companies, and markets in which the stocks can be traded.

This system also applies to the cryptocurrency market. The development of cryptocurrency and exchanges has naturally led to the public's investment in cryptocurrency. Finally the public is able to invest in cryptocurrency and the issuer of cryptocurrency has made it possible to raise money from the public. This is similar to IPO and is called Initial Coin Offering (ICO). In other words, it is ICO that gives the public an opportunity to buy cryptocurrency.

Now, if you have innovative ideas and ability to realize, you can easily attract funds by issuing coins. MasterCoin attracted $5 million three years later after the first crypto exchange launched in July 2013 and Ethereum sold $18 million in August 2014. It means that cryptocurrency has approached the public much closer. Since ERC-20 tokens based on Ethereum platform became easier to issue, ICO was the only one in 2014, surged to 30 in 2016 and to 883 in 2017 ($6 billion dollars). In February 2018, Telegram, which already has an existing messenger business, attracted $850 million in ICO pre-sale.

ICO is in its golden days. It is a crisis for investors like existing venture capital. A company can attract cash directly by issuing cryptocurrency and cryptocurrency investors can get cash instantly by selling the money to the market. It is a moment when everyone can be satisfied and happy. Founders do not have to go to venture capital to raise money, and limited partners (the investors of venture capitals) do not have to wait for the company to be listed on the stock exchange for a long time. ICO solves everything.

Combined Effect of Blockchain, Cryptocurrency and ICO

By combining these three things, we were able to solve what we could not figure out with the structure of a corporation. The issuance of cryptocurrency makes it easier to attract funds, the investors can sell at the exchange, and other market participants can issue cryptocurrency and be compensated them with incentives. With the combination of blockchain technology, it is possible to decentralize, transparently distribute and lower the associated costs.

Now you can design your own token economy by combining these three things. It is a structure that connects the real world with the virtual world and everyone can make a profit economically. This is the token economy. I saw the possibility in Steemit.

4. Cases of Token Economy: Steemit

Steemit is an incentivised, blockchain-based, public contents platform. Shareholders and investors in social media such as Facebook, Twitter, and Reddit have accumulated immense wealth based on contents created by their platform users. Meanwhile, in 2014, Reddit hypothesised that the platform would be further developed if Reddit's shares were given to contributors who posted, commented, or voted on their platform, Reddit.com. The two co-founders of Steemit, Ned Scott (CEO) and Dan Larimer (CTO) were against the domineering and arrogation of social media and they claimed the contributed users of Steemit should be rewarded. They founded a contents platform named Steemit in January 2016.

In order to solve the intrinsic problems of the content business and to reward all the community participants, Steem gives a hint from cryptocurrency and credit unions. Cryptocurrency has sought to solve the problem of high cognitive and opportunity costs and the inconvenience of payment for content. It also has distributed the compensation appropriately to writer, curation, and blockchain maintenance. Not only did it compensate, but it also helped to recover the liquidity that was released to the market (Steem Power) and contribute to the Steem community development by providing the Steem Power owner with influence (Voting Power). In this part, I pay money to become a community member, borrow a credit union structure that produced goods and services for the union and produce the consumed goods. Steem's token economy is unbelievable. It breaks down funding and reimbursement into three tokens: Steem, Steam Power and Steem Dollar.

The Steemit analysis article I wrote earlier will help you understand token economy of Steem. My apologies, it is written by Korean languages. I will translate it soon. https://steemit.com/kr/@mechuriya/1

5. What should I do?

I have enjoyed the great flow of the Internet since the mid 1990s. I also experienced the mobile revolution that was triggered by the launch of iPhone in 2007. On both days, as a venture capitalist (IDG Ventures Korea and Cognitive Investment), I have accepted technology before others and applied it to investments. But I was not thrilled or excited as I am now. It is an endorphin that I feel for the first time in 20 years since I have worked.

The blockchain is the revolution that will lead the future. Cryptocurrency is enabled with the foundation technology. However cryptocurrency is inconvenient to use and there are not many places to use it in reality. The technology will be developed rapidly and universal currency will come out shortly, so the usage will be eventually expanded. If you do not design the economic incentive structure well enough, it will be nothing more than a useless digitalized address. I'm afraid it might be happen. This is what I pay attention.

The blockchain technology, cryptocurrency, and ICO should be used well enough. We should take this opportunity well enough. It might be the chance given by heaven. We cannot miss it. To do so, we must design a token economy that can be rewarded for all market participants, eliminating the inconveniency of payment transactions, functioning as a value store, and growing as long-term investment without worrying about inflation.

Cryptocurrency is currency, too. If you cannot perform the most basic function of money, it is not money. Ethereum has provided a platform for many applications (dApp, decentralized App), but the token economy is not yet implemented properly. However, as Steemit has shown, a well-organized token economy works and grows in the marketplace.

This year, there will be hundreds of ICOs like last year. Utility tokens will be a general trend rather than platform currency like Etherium. Decentralized applications need to be well integrated in the real world to solve the existing inconveniences so that the economic structure can be worked on. Unfortunately, current ICOs are in full swing to get money by issuing coins right away. If you keep doing this in a wrong way, you will lose the chance to break the 400-year-old corporation structure and solve the problems of it. I am very afraid of it.

I want to solve this part. I will devote myself to the establishment of the token economy with the know-how accumulated from economics at the university and financial management at the graduate school and with the experience from high-tech companies as a venture investor for the past 20 years.

I am a ‘Token Economy Architect’ from today. I am a designer who organizes an systematic economic structure in solving social and economic problems through tokens. I will declare it since no one does it.

THE DECLARATION IS COMMENCEMENT AND MOVEMENT.

I cannot do this movement alone. When many people join together, the effect of the movement will be double. And when many people support it, the blockchain ecosystem becomes more healthier. I appeal to join.

I will start with small steps.

First of all, I made a ‘Token Economy Study Group’ on Facebook. https://www.facebook.com/groups/1000994206717056/

I think the core of ICO is to design a balanced token economy that is rewarded to all participants. Let’s study, analyze, and share examples of well-implemented token economics to prepare for a tokenized world with my group in centralized Facebook. Let’s overcome the limitations of a corporation structure and make the world where shareholders, customers, and community members can take their wealth. Let’s make it together. Every little bit helps. I will support whatever I could do. It will be tough if you do it by yourself. But I believe it could be possible if we help one another, all together.

And I will make a token economy myself.
I will start in advertising sector.
With AD4th.
May the AD4th be with you.

March 1, 2018 (originally written on March 1 in Korean and translated on March 10, 2018)

Matthew Lee

Korea’s first Token Economy Architect, Ph. D in Management

[email protected]