Leaving the Paper-Based Economy Behind
It is amazing how much we’ve achieved economically thanks to our traditional equity-based system. Thanks to all the accountants and law firms that keep it all squared away and to all the administrative work and stock clearing houses that tell us who owns what and how much.
We’ve come far — but we’ve reached the plateau.
Digitization and automation is how we take equity to the next level. And in this article, we will explain why. But first what is digitization?
In the crypto world when people say digitization it usually refers to tokenization which is just a fancy way of issuing a token to represent something, something like equity share in a company. Tokens don’t live in a private database instead they are recorded on a decentralized blockchain for everyone to see and use.
This means tokens have the real potential to do equity better because they are much easier to share and void of all the admin mentioned in the intro.
It’s not hard to see tokenomics superseding traditional equity if only for the fact that tokens are truly compatible with the internet.
The most popular use case so far for tokens has been the easy creation and distribution of equity of a company to raise money. Hence the ICO craze of 2017. Today, however, there are major experimentations happening with different ways to approach tokens which we shall get into.
But first, we must understand the current traditional equity system and why it’s limited.
In short, equity is created with the help of large law firms and heavy litigations to enforce contracts.
Firms write contracts stipulating who owns what and eventually the company data will be all ‘digitized’ into a system like a CUSIP and/or register in an ISIN which are essentially data silos for company records.
These databases are highly restricted and only a select few entities such as the DTCC will have access to the database for the purpose of clearing all the trades of stock on the NYSE.
For perspective, the DTCC clocks volumes of over $2 quadrillion USD in a year. Quadrillion, that’s a number you don’t see every day.
The bottom line is that the current equity system is super centralized, inaccessible and relies on select for middlemen, thus creating friction and illiquidity for everyone.
Some of the limitations of our current analog equity system:
Getting a company publically listed on the NYSE costs approximately $500,000. It does not include all the hidden costs along the way in the form of contract formation that can take months to set up depending on the type of business.
Admin and accounting has to be outsourced and verified and checked by multiple parties to reconcile the ‘who owns what and how much’, ranking up high accounting maintenance cost and time.
Largely due to not being compatable with the internet companies lack an easy way to distribute company shares without involving multiple middlemen. This also means global transferability is often costly or impossible.
Costly Conflict Resolution
Resolving any conflicts that may arise means long days in court incuring again more resources.
These friction points are contributing to the rift going on today between real company valuation versus the actual valuable services a company may provide.
Separation of Equity and Utility
This disconnect going on between the equity of a company and the value of that company’s products and services is one of the major issues with the current system because it’s designed to prioritize profits over creating real things of value.
If a corporation’s aims were only for profits, shouldn’t that profit naturally come from building better services and products that are useful to our lives? and shouldn’t that be reflected in the companies share price?
The stock market is supposed to do exactly that, but in reality, the market has become more speculative than some would like to admit.
For example, corporations today are buying back their own stock on an unprecedented scale. Roughly 93% of profits made by US corporations in the last decade came from the rising share price of the stocks that they keep buying back.
Corporations earn more through buying back their own stocks to a collective tune of $4 trillion USD.
That’s a load of value that is not being shared with the public. Also, that’s value not being put towards new ideas, creating jobs or making companies better.
It isn’t illegal for corporations to buy back stock but we are getting to a stage where it might need to be because it is messing up price signals and creating major disincentives for all parties involved that don’t own the stock, workers for example.
Let’s look at a real example of a mismatch of incentives.
Consider the gig-based companies — Uber, Airbnb, Lyft and their countless copy cats. They not only provide an affordable service to customers but more interestingly, they create jobs in the form of drivers and hosts that rent out unused real estate and cars.
These gig workers keep the companies economic engine alive, but they have zero stock in the companies.
Wouldn’t it make sense if the workers in this economy owned part of the economy they themselves have created? A token perhaps?
A token added to a gig-based economy can work as an accurate barometer of a company’s health because of the token. If no one uses the service the tokens become useless and if they use the service it becomes valuable. Simple.
We have the tools today to better align the incentives of workers in a gig economy but how that’s done comes down to the tokenomics craft.
Consider the following comment by Larry Ellison, founder of Oracle.
Larry declared both Uber and WeWork to be “almost worthless.” The reasoning behind his thinking is that both companies don’t have a load of loyalty from the drivers and tenants. The workers just aren’t incentivized to stay on the Uber or WeWork ship if a cheaper and profitable option comes along.
That’s because they have no stake in the company.
Point is, these corporations could gain a lot by offering a token in some form because it can really tie people to the success of their ecosystems.
It’s true, companies do issue stock options to employees but in the overwhelming amount of cases, they do not due to the clunky regulatory framework that’s blocking companies from sharing their own pie.
To make the point concrete, let’s consider the benefits of linking shares of a company more closely to a utility token:
Since crypto tokens are digital they allow for a load of automatic functions that synergize with the countless digital services that we use today.
Because tokens have temper proof accounting control systems inbuilt into the blockchain network it greatly reduces the headaches around ‘who owns what and how much’.
More Accurate Pricing
If the utility of the token is well placed into the product, in that it synergizes well with the product, it can provide better pricing for the product along with greater tangibility to the token.
Token holders can store their own tokens in their wallet. Allowing more parties to get involved in a direct way and exercising self-sovereignty.
Global & Transferable
Tokens allow for true global value transferability and allowing many more people to get involved in a very liquid way compared to traditional stock which is typically restricted to a country.
Successful tokenomics create great system resiliency which in turn can lead to the companies products and services functioning autonomously as the network economy grows and becomes self-sustaining.
Unlimited Token Models
Well crafted token models will organically lead to community-owned and operated digital services that don’t need expensive litigation to compel honest behavior. Basically, a free market working at its best.
Already there are startups pushing the boundaries of tokenization. Steemit a communication platform that aims to incentivize content publishing and social media interactivity is one example of an alternative token model.
Steemit started off with Steem which is a base token on the platform that is freely tradeable. Later they created Steem Power which cannot be traded easily but acts more like equity and gives users voting rights.
They finally integrated the Steem Dollars as their third token. Steem Dollars are freely tradeable and act like a stable coin that does not fluctuate as they are backed by the US dollar.
The possibilities are endless and we are going through a transition period where many of the rules and contracts we have today on paper are slowly being programmed into digital smart contacts.
There is still a long way to go before we get all the contracts right but it has to begin with a token.
Starting a Token
In the early days, people would fork the Bitcoin code and change a few rules and start a whole new token.
After the advent of the ERC-20 protocol, many would launch right away on the Ethereum blockchain as early as possible and try to get listed on as many exchanges as possible.
But times have changed, launching directly on the blockchain can be counterintuitive. A lot can go wrong since token rules can’t be changed once submitted to a blockchain. And getting listed on exchanges can cost hundreds of thousands of dollars.
Instead, a more organic way of starting a token would be within your own exchange system.
At bitHolla we’ve created the tools to do exactly that with the HollaEx Kit, a powerful exchange software kit that allows anyone to run an exchange and create their own tokens internally. Users of the kit would simply add the token during the exchange setup.
Starting a token within an exchange means there is a marketplace for the token from the get-go and it allows for easy purchasing and distribution of the token because there is an inbuilt wallet for accepting deposits.
The exchange setup can set the early stage parameters for the token before submitting it to the blockchain, for example, token name, symbol and supply can all be set within the exchange setup.
The HollaEx Kit essentially kills two birds with one stone. One, it allows the token to be created which means early marketing and promotion of the token can take place. And two, it allows for a marketplace to develop around the new token thus avoiding expensive listing fees and long negotiations with large exchanges.