Token Economics

Historically, commodities like gold or silver have acted as medium of exchange of value (currency) because they are expensive to extract. However, they turned out to be impractical because they lose value by wear and tear. Instead, emperors and kings stored the gold and silver in treasuries and issued tokens (tin coins and paper notes) to represent the precious metal. The tokens could always be redeemed for real gold or silver.

Digital Tokens

With distributed ledger technology, we got digital tokens. They can represent all kinds of assets or access-rights and have the following advantages:

  • They do not wear out like metal and paper tokens,
  • they are hard to counterfeit,
  • they can be exchanged as easily as text messages,
  • they are programmable,
  • they facilitate fractional ownership, and
  • they make illiquid assets liquid. 

“Tokens might affect the financial world in the same way as email affected the postal system” – Shermin Voshmgir in the book “Token Economy”.


Tokens can be either fungible or non-fungible

Fungible tokens are identical and interchangeable like:

  • Cryptocurrencies that have value because their supply is limited and people have faith in the cryptographic system that supports them.
  • Utility tokens that provide access to an application or a service. 
  • Digital cash issued by state authorities.
  • Privately issued digital cash collateralized by underlying assets.
  • Security tokens that replace the paper version of stocks, shares, bonds, mortgage deeds, etc.

Non-fungible tokens  (NFTs) are unique by nature and are not directly interchangeable. They are programmable property and can represent everything that can be owned. They are already used to represent digital collectibles and limited editions of digital artwork, but can also represent physical property like real estate, vehicles and gemstones.

Furthermore, they can represent voting rights, door keys, passes, train tickets, copyright, software licenses, certificates, etc.

For artists, one of the very interesting advantages of NFTs is that the certificate can be programmed to pay the artist a share of all secondary sales of a work. If the same functionality was generalized to cars and other products with built-in obsolescence, it could incentivize manufacturers to increase product durability.

Digital Cash

Cash tokens – like the the original tin coins and paper notes – are back; but this time they are digital, which offers many additional benefits: 

  • They act like old-fashioned cash and are stored in digital wallets (on a smartphone or the like) and not in banks.
  • They make money transfers instantaneous.
  • They support micro-payments: a car automatically pays the road for every kilometer it runs, an artist gets paid when we listen to her music and billions of internet-of-things devices can transact with each other every second.
  • They can be programmed and thus be integrated into the emerging decentralized finance (DiFi) system.
  • They open up new tax opportunities like collecting a small fee on every payment.
  • They can replace fractional reserve banking with a financial system similar to full-reserve banking.
  • The control over money supply become more powerful.
  • They can coexist with old fashioned physical tokens (coins and notes). 

Central Bank Digital Currencies (CBDC)

The administrative chaos and fraud, that occurred in many countries when relief packages and checks were distributed during the pandemic, revealed the need for more secure monetary systems. A possible solution is the so-called “Central Bank Digital Currency” (CBDC) which is a third form of sovereign money alongside central bank reserves and physical cash.  

The  People’s Bank of China has already issued a digital yuan, and the rest of the world is gradually following suit. The technical solutions range from traditional account-based systems build on monolithic databases to token-based Blockchain systems involving private banks and fintech service providers as validators (source).

CBDCs can be issued in a retail version as well as in a wholesale version. The the retail version is used by consumers and businesses – just like digital bank notes, while the wholesale version is used to facilitate payments between banks and other financial operators. 


Instead of issuing digital fiat money themselves, central banks can let private players issue stablecoins – ie digital cash collateralized by underlying assets.

There are two ways for private entities to collateralize stablecoins:

  • In the short term, most stablecoins – like Tether – will be hybrid constructions where digital tokens are collateralized by analog financial assets like fiat currencies, government bonds, central bank reserves  and wholesale tokens, and/or by physical commodities like gold.
  • In the longer run, stablecoins are likely to be backed solely by digital assets like cryptocurrencies or security tokens (bonds or fractions of real estate). Some of these tokens – like the DAI – live on the open Internet and are not subject to regulation by any nation-state.

After the CORONA lockdowns, many governments tried to restart society and stimulate consumption by giving cash directly to citizens as so-called helicopter money. But unfortunately, there is no guarantee that people spend the money and don’t put them in the bank.
Digital cash offers a much more accurate method of stimulating specific forms of consumer behavior since they can be programmed to be used only on specific goods and within a certain time limit (source). The pandemic has thus made many governments realize the need for digital cash.

Banking the Bankless

Poor people are often bankless either because they do not have a personal ID, because the bank is too far away, or because it is too expensive to open and maintain an account. Furthermore they often have no credit rating or do not have legal rights to the house, they live in, or to the land, they farm. Without access to banking services they can not save up, start a business, transfer money to remote family members or shop online.

But a solution is underway in the form of decentralized financial services on Web3 (DeFi). The system is potentially capable of decentralizing banking and offers all of the same products as the traditional finance world such as lending and credit arrangements without the need for a centralized authority. Anyone can loan their capital to borrowers worldwide in return for digital asset collateral.

A Global Reserve Currency 

The US Dollar has served as a global reserve currency since World War II – and since the gold redemption was abolished in 1971, the Americans have paid their foreign bills with money they “printed” themselves. The Dollar is US’ biggest export. 

It is therefore high time that the world community came together to create a shared digital reserve currency, as the Bank of England has suggested (source). Alternatively, non-governmental stablecoins will take over the role.

How Many Different Cash Tokens Do We Need?

There is no need for fewer coins – but for more. Every town (like Bristol) and every retail chain (like Walmart) can create their own coin and it is easy to imagine a revival of the national currencies in Europe. We are heading to a world where the money of the people, the money of the state and the money of corporations will be competing.

Large global companies such as Apple and Amazon can benefit a lot from introducing their own coins that could function as internal means of payment in the supply chains. Furthermore, such coins could integrate customers and other stakeholders further into the networks. In doing so, these platforms can bypass national governments and save transaction costs and taxes.

Democratizing Fundraising

In the future, real estate developers could pay their suppliers (architects, engineers, and contractors) with tokens representing fractions of the finished building. Once the construction is completed – or maybe earlier – the participants can sell their tokens either to new homeowners or on the open market. Everyone is a partner and a stakeholder, and everyone is motivated to get the best out of the project.

The traditional way for startups to raise funds from investors is to sell shares publicly through an IPO (Initial Public Offering). In a token economy, they can raise funds via a token sale in the form of:

  • either a STO (Security Token Offering), where rights to future profit are sold in a tokenized version of an IPO, 
  • or an ICO (Initial Coin Offering) where utility tokens are sold as rights to future benefits, like when an airline sells frequent flyer miles to finance the purchase of new aircrafts. Utility tokens can be exchanged, but they give no ownership to any part of the issuing company.

The Ethereum Network was funded in 2014 through an ICO, in which a number of Ether-coins (ETHs) were distributed to stakeholders. Ether is a utility token that is used to pay for services on the Ethereum network and were sold to potential users and given as a reward to core developers. This funding method came to form a school for a lot of startups, who issued their own coins to crowdfund business ideas. 

Tokens have the benefits that they can be exchanged and traded very easily – but first and foremost, they can be programmed and capital can be made behave in a specific way. 

One particular way to engineer a token is a so-called bonding curve which specifies the price of a token as a function of it’s supply.

This curve shows how the token price rises as the supply increases. The tokens can be sold back to the bonding curve at any time. An S-shaped bonding curve incentivizes the early adopters and de-incentivize funding after reaching a state of maturity.

You can download the full essay as an e-book in pdf or  ePub format.

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