Tokens are the new u201cnewu201d thing in the bl

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Tokens are the new u201cnewu201d thing in the blockchain space. Just when everyone thought that blockchains were hot enough, everyone realized that tokensu00a0 are u00a0theu00a0business modelu00a0foru00a0 Web 3.0 . A decentralized system spreads control among many parties. It may or may not be tokenized. The key benefit of tokens is tou00a0 align incentives u00a0among participants…

Tokens are the new u201cnewu201d thing in the blockchain space. Just when everyone thought that blockchains were hot enough, everyone realized that tokensu00a0 are u00a0theu00a0business modelu00a0foru00a0 Web 3.0 . A decentralized system spreads control among many parties. It may or may not be tokenized. The key benefit of tokens is tou00a0 align incentives u00a0among participants of the ecosystem. Itu2019s au00a0 positive-sum game u00a0among the tribe of token holders.

(And letu2019s not forget the windfall of a token launch, if you choose that path.) So far, only startups have launched tokens. But what about enterprises? Could we tokenize Facebook? What about Amazon or IBM? How? What would be the benefit? In short: tokens will eat the enterpriseu00a0 from within , because investors will make moneyu00a0 andu00a0 the community will gain.

Weu2019ll have crypto tribes that started as companies. Repeat across many enterprises and it means goodbye to the stock market. Finally, this turns out to be a new response to the ” innovators dilemma ” u2014u200ahow can enterprises compete given their tendency to protect their profits (aka the status quo)? Letu2019s explore in more detail. Approach Hereu2019s the process: Tokenize .

u00a0Shares become tokens. n Decentralize .

u00a0Spread power among more people; users get tokens for past and future contributions. n Melt into the community .u00a0Over time, both value and power spreads further. n When one or a few enterprises do this, and actuallyu00a0 make money u00a0for their shareholders in doing so, then other enterprises will follow suit. In the end, itu2019s all crypto tribes. Example: Facebook Letu2019s walk through this recipe, using Facebook as a example. Step 0. Statusu00a0quo Facebook is at odds with its users.

Facebooku2019s founders and shareholders have made massive amounts of money. Yet its users didnu2019t, despite contributing the key personal information and content that is the heart of Facebook. This is a basic tension: Facebook has a bias to openness, versus usersu2019 privacy. With its billions of users and high engagement, Facebook has become enormously powerful. Yet itu2019s controlled by a small handful of people. This is dangerous for society.

Especially when itu2019s not structured tou00a0 handle such a responsibility . According to a recent survey , 70 percent of data security professionalsu00a0 believe that personal data parsed by social media should be regulated by governments. There have been various proposals to improve the situation. One idea is to get the courts to consider it au00a0 monopoly u00a0and break it up. This relies on slow-moving government processes. Other ideas come from the blockchain world.

Namely: overtake Facebook from the bottom-up, by building something decentralized, and try to get the users to come. Weu2019ve seen many such efforts at decentralized social media. But success is limited so far. The greatest challenge is how to populate the network. Itu2019s chicken-and-egg: people only join if their friends are there. Itu2019s hard to crack two billion highly engaged users.

Thereu2019s a variant: build something decentralizedu00a0 and tokenized . This can only help, because early token holders are your first users, and theyu2019re incentivized to bring in their friends. HODLers gonna promote. So, tokenization increases virality. But itu2019s still no guarantee to overtake a network with two billion engaged users. These ideas assume a start at zero, and attacking from below with something faster, sleeker, more viral.

And they might work; but Iu2019ve come to realize thereu2019s another way. Tokenizeu00a0 from within . Hereu2019s how it works. Step 1. Tokenize. In this step, Facebook shares ( ticker:FB ) get converted to tokens.

There are about 3 billion shares in Facebook. So here, Facebook (the company) issues 3 billion Facebook tokens ($FB) on a blockchain.

Then, Facebook converts each of the 3 billion shares to a $FB token in a contractual arrangement. Or, it simply starts using the blockchain as the registry of who owns what (1 share = 1 $FB). Delaware isu00a0 moving towards u00a0making the latter possible. Either way, we end up with a blockchain holding all $FB tokens that have replaced the previous FB shares. Itu2019s tokens as securities. Step 2. Decentralize.

Up until this point, the governance of the tokens is still in the hands of Facebook (the company). And itu2019s still one share one token.

Step 2 is where the real change occurs: spreading power, and tokens for users too. The following need to happen simultaneously. Spread governance .u00a0Change governance so that the community has more control; then that $FB is not controlled merely by Facebook the company. The key responsibility is setting the rules for protocol updates (API changes) and token governance (monetary policy).

There are many possible governance structures, from (1) fully on-chain and automatic (still dangerous, as weu2019ve seen withu00a0 TheDAO ), to (2) using a traditional non-profit controlled by a set of 20+ caretakers, to (3) starting as a traditional non-profit then becoming automatic over time (my fav, like inu00a0 IPDB ). n Make the blockchain public-facing .

u00a0Anyone can read to it or write from it; and no single entity is running all the servers. This means that key protocols for Facebook functionality are open, specifically the ones where tokens are given or spent (see next two bullets). Ideallyu00a0 allu00a0 of Facebook becomes open source.

Wouldnu2019t that be cool? This is more than just a pipe dream, since open source would actually benefit Facebook the company in this new regime. And in blockchain-land, the value ultimately lies in theu00a0 (fat) protocols , not in the implementations.

n Tokens foru00a0 pastu00a0 value-add .u00a0Facebook (the company) issues 3 billionu00a0 moreu00a0 $FB tokens to theu00a0 existing users u00a0of Facebook. It would reward users proportional to their degree of interaction with Facebook over its history.

You get $FB for every post made, for every picture shared, for every poke. Or perhaps more in line with the status quo business model: you have a decentralized service that asks you to use your data for marketing purpose in return for other value. n Tokens foru00a0 futureu00a0 value-add .u00a0Facebook sets up rules such that value-creating actions on Facebook get $FB tokens.

For example, each time I post a picture, I get $FB. There is an emerging design practice on how to do this well (e.g. avoid spam), with precedents such asu00a0 Steemit ,u00a0 Braveu2019s basic attention token , andu00a0 userfeeds .

Furthermore, people can earn tokens for other value-adds too, such as adding features or improving performance. n When this is done, it will be obvious for crypto exchanges like GDAX or Kraken to add $FB tokens. So in steps 1 and 2, FB value has been moved from the traditional exchanges (stock market) to new crypto exchanges. What becomes of Facebook the company? One option is to dissolve it. This is broadly ok because employees are incentivized to contribute simply because they own $FB; though I acknowledge there are messy details to sort out. Another option is for Facebook the company to simply become a service provider to the public $FB blockchain; itu2019s incentivized to improve the service because by doing so it earns more $FB tokens on behalf of its employees. Now note that other individuals and organizations are able to improve the service too. In my example, I gave 50 percent of $FB to existing shareholders and 50 percent to users.

It could be another ratio. But u201chalfu201d is a good rule of thumb for a starting pointu200au2014u200aeach side is within an order of magnitudeu00a0 and avoids nit-picky arguments. Step 3: Melt $FB into the community n This step is something gradual that happens over time. At the beginning of this step, half the $FB tokens are owned by the previous shareholders, and half by the users.

As time goes on, it could spread out more as users earn $FB tokens for usage, or more people buy $FB due to the lower friction to buy it. n And some will hold on for dear life. HODL those $FB tokens.u00a0 Facebook maximalism.

u00a0You heard it here first.

n You might ask why would Facebook shareholders ever go for this scheme. The main reason is thatu00a0it will make them money:u00a0the primary incentive of a typical shareholder. Itu2019s a huge value add if Facebook found a way to not be at odds with its users, the way it is now. And in the new scenario, itu2019s not just a neutral relationship; users are incentivized tou00a0 addu00a0 value. Moreover, it liberates Facebook from quarterly earnings reports that are the bane of planning long-term and doing the right thing. Instead, there is a balance between building the business and building community. This alone could drive the value more than 2x, which then pays for itself.

As bonus value, there is improved liquidity due to lower friction to buying $FB than there was in buying FB shares; and finally there are fewer bottlenecks to adding value since anyone can improve the code base. n
n A potential move to decentralize Amazon would involve tokenizing its various business units . n Example: Amazon n Here, using Amazon as an example, I describe tokenizing oneu00a0 business unit u00a0at a time. It has the same result and same benefits of tokenizing the enterprise all at once, but with lower risk. n Letu2019s take a quick step back, for context. Many folks are excited by how blockchain with IoT (Internet of Things) technology u00a0 could help transform the supply chain , for everything from cars to drugs to intellectual property. It could bring transparency to previously opaque sectors, reduce fraud and therefore insurance costs, and unlock new business models. n However, this decentralized dream could be stopped dead by the new octopus: Amazon.

The original octopus wasu00a0 Standard Oil , with its tentacles and massive wealth touching every corner of the planet. Amazon is following a remarkably similar pattern. (Need convincing? Read about Rockefeller then Bezos.) n This means that the incumbents with their emerging decentralized supply chains are headed into an all-out war with Amazon. Itu2019s not clear who will win. n Thereu2019s another path.

u00a0 The octopus itself u00a0decentralizes. And it does so by choice.

n The recipe for this octopus named Amazon could be like Facebook, converting the whole enterprise at once. But thereu2019s a lower risk option for Amazon.

Amazon itself already has many independent business units. They each have their own API, and their own profit & loss. In fact, this API-per-business effort is precisely what spawned AWS more than a decade ago. n So, hereu2019s a simpler, lower-risk path for Amazon: n Tokenize + decentralizeu00a0 oneu00a0 of the business units. n If that works, repeat for other business units. n Once this has happened for all the units, Amazon is tokenized and decentralized.

n Over time, it melts into the community. n More Examples n Letu2019s look where the biggest payoff will be. One is where enterprises are at odds with their customers or broader communities, and therefore have the most to gain by aligning incentives. Here are some: n Visa .u00a0Visa is under the interests of its shareholders and banks. Itu2019s always been at odds with merchants with high fees; this has led to billion-dollar lawsuits. So, Visa could tokenize and include merchants. This is similar for other credit card companies too.

n Uber .u00a0Let Uber shareholders, drivers and riders unite in tokens, to share in the value creation. And while weu2019re at it, letu2019s tokenize taxi commissions too and let the exchanges sort out where value should flow. But, wonu2019t self-driving cars contradict the driversu2019 interests? My answer: let the network hard-fork to both options. The section below on Innovatoru2019s Dilemma elaborates;) n Twitter, Medium, and really all existing social media. This is just too obvious.

If you feel like youu2019re missing something, readu00a0 this . Letu2019s just tokenize and move on already. n Universal Music Group, Sony Music, Warner Music Group .u00a0The big three record labels often find themselves at odds with the musicians they represent, not to mention the rest of the music ecosystem.

n Spotify, SoundCloud, Netflix, Getty,u00a0Steam ,u00a0and really all media distribution andu00a0 aggregation/filtering/recommendation u00a0platforms, from music and movies, to photos and video games.

u00a0 n IBM, Microsoft, Intel, banks .

u00a0Dear enterprises hugging blockchain already: hereu2019s your endgame. When shall we start? n Historical Precedents n A tokenized, decentralized enterprise might seem like a stretch at first glance. Perhaps even a huge stretch. But, we have precedents which show us steps towards this: n Business unit with a tokenized core.

u00a0For example, almost every airline on the planet has some sort of u201cair milesu201d program. Many of these have even spun out into their own businesses, such as Air Canadau2019s Aeroplan.

Blockchain experiments abound for these kinds of applications, from air miles to ticketing. n Series-A stage startup that tokenized its core.u00a0Numerai switched to rewarding its community of data scientistsu00a0 in tokens , turning zero-sum game among scientists to a positive-sum game. Next upu200au2014u200adecentralizing the tokens. n Series-B stage startup that tokenized its core.u00a0Messaging app Kiku00a0 introduced u00a0Kin tokens, creating a positive-sum game for its ecosystem.

n Enterprise that tokenized its core.u00a0For example, reportedly about a decade ago some of the big credit card vendors tokenized (but didnu2019t decentralize) their internal flow of value. This led to big savings on currency exchange, lowered friction within the network, and more. n Stock markets n After one enterprise tokenizes with success, ie. makes money for shareholders, it will spur a second enterprise to do the same. Then a third, a fourth, and so on.

Before we know it, most enterprises (especially publicly-traded ones) could have tokenized, decentralized, and melted into communities. n Maybe some enterprises will hesitate. Or leaders will have their own selfish reasons to not do it. Well, we might not have to wait for a publicly traded company to tokenize itself. Instead, if a community gathers enough assets, it could simply buy the majority of (voting) shares on the market, to gain control of the company. Then that community tokenizes, decentralizes, and melts the enterprise.

It can be a domino effect: done in a good order, the wealth creation from tokenizing that company may be enough to buy the next company on the stock market. And so on and so forth.

(Alas, this is also a new angle for corporate raiders.) n Either way, the result could be: every single company on the stock market has tokenized, whether it chose to or not. Traditional stock markets as we know them will be empty. The new tokens on crypto exchanges. Corollary: invest in exchanges. n The innovatoru2019s dilemma n This is the internal conflict that prevents successful companies, leaders in their industry, from adopting a new technology, falling behind the curve and failing to innovated any longer to the point of becoming redundant. n Some of the reservations to investing in a new technology – u201c a billion dollars or it doesnu2019t matter u201d and u201c why would we cannibalize ourselves? u201d – exist for enterprises even when valuation isnu2019t sky high.

Enterprises try to preserve their status quo, to preserve their profitsu200au2014u200aat the risk of death by disruption.

Clayton Christensenu2019s 1997 booku00a0 The Innovatoru2019s Dilemma u00a0described this problem.u00a0Christensenu2019s proposal was for the enterprise to spin out a company, and let that spinoff innovate on its own without the enterprise hampering its movement.

n A Newu00a0Solution n u201cTokenize the enterpriseu201d is a new answer to the innovatoru2019s dilemma. It allows the enterprise to embrace change, because the enterprise has become the community, and vice versa. The community can decide if it has the courage to embrace change. And, crucially, if some subgroup doesnu2019t agree, it can splinter off (yes, fork) to do its own thing.

Then, a billion dollars doesnu2019t matter. Communities can self-organize around the original community or the new one, based on their beliefs. Just like ETC vs ETH. n Put another way: for the tokenized enterprise,u00a0 hard forks are the new spinoff . n Coase Theorem n The new communities will be much more fluid. Membership in each tribe is really mostly about what tokens you own, and therefore what communities you are incentivized to contribute to.u00a0 Coase Theorem u00a0means that if transaction costs within an organization are radically lower than between organizations, then organizations grow giant.

Hence, large enterprises. n But blockchains change this. Blockchains radically reduce the cost of communication between organizations, compared to within. So, the natural size for an organization can be far smaller. So, once large enterprises have tokenized, then it will also be natural for them to split into smaller and smaller entities; and to re-form as needed. (Thanks tou00a0 Ian Grigg u00a0for this framing.) Is this the newu00a0 liquid enterprise ? n Hollywood has actually done something similar for decades: a group of financiers, producers, directors, crew, and actors form around a specific movie project.

They make the movie, make the money, and move on. The groups are different movie-to-movie.

n Conclusion n What Iu2019ve described might sound really far out. But, we have to try to imagine. And with just a small stretch of that imaginationu2026u00a0Enterprises melt into the community. The stock market melts into crypto exchanges.

Innovatoru2019s dilemma spinoffs = hard forks. The future of business will be token tribes, formed Hollywood-style. n Let us paraphrase J.B.

S. Haldane to remind us:u00a0 The future is not only stranger than we imagine, it is stranger than we can imagine. n Are you ready? n
The post Tokenize or die: Will industry giants be forced to dilute their power? .

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