Socio Economic Transformation through Radical Decentralization

Socio-Economic Transformation
through Radical Decentralization
Jongseung Kim
SK telecom Blockchain Business Development Unit
2018. 11. 1

Total Crypto Market Capitalization
<Source:https://coinmarketcap.com/charts>

Bitcoin Miners Revenue
<Source:https://www.blockchain.com/ko/charts/miners-revenue?timespan=1year>

Q3 2018 ICO Market Analysis
<Source:https://www.coinspeaker.com/2018/10/04/quarterly-ico-market-analysis-q3-2018>
•The third quarter of 2018 was not as
successful for ICOs as the first and second
quarters.
- Totalamountof fundsin Q3($2,434mil.)
collectedare less than Q2($4,269mil.).
•Nevertheless, the third quarter was rich
in interesting events and large ICOs.
- tZEROproject(asubsidiary of Overstock):
The first alternativetrading systemfor
cryptographictokensthat the US SEC assigns
to the categoryof securities(tZERO collected
$134 million)

Institutional Technology
Information Technology
Two Characteristics of Blockchain Technology
Decentralization

Three types of Decentralization
<Source:https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274>
Architectural
(de)centralization
how many physical computers is a system made up of?
How many of those computers can it tolerate breaking down at
any single time?
Political
(de)centralization
 how many individuals or organizations ultimately control the
computers that the system is made up of?
Logical
(de)centralization
does the interface and data structures that the system presents
and maintains look more like a single monolithic object, or an
amorphous swarm?

Decentralization Dimension

Blockchain’s Decentralization
Blockchains are politically decentralized
(no one controls them)
and
architecturally decentralized
(no infrastructural central point of failure)
But
they are logically centralized
(there is one commonly agreed state and the system behaves like a single computer)

Three reasons for Decentralization
Decentralizedsystemsare less likelyto fail accidentallybecausetheyrely
on manyseparatecomponents that are notlikely.
Fault
Tolerance
Attack
Resistance
Collusion
Resistance
Decentralizedsystemsare more expensiveto attack and destroyor
manipulatebecause theylack sensitivecentralpoints that can be attacked
at much lowercost thanthe economicsize of the surrounding system.
it is much harderfor participantsin decentralizedsystemsto colludeto
act in ways that benefitthemat the expense ofotherparticipants.

Making Sense of ‘Cryptoeconomics’
“Crytoeconomics is the practical science of using economic mechanisms
to build distributed systems,
where important properties of that system are guaranteed by financial incentives,
and where the economic mechanisms are guaranteed by cryptography.”(Joshua Stark)*
Cryptography Economics
+
<Source:https://medium.com/l4-media/making-sense-of-cryptoeconomics-5edea77e4e8d>
Signatures
Hash Functions
Zero-KnowledgeProofs
…
Game Theory
IncentiveDesigns
InstitutionalDesigns
…

What is ‘Economic Design’?
 Game theory provides a structured language that helps in analyzing interactive
situations; when several individuals have to make decisions, and the outcome depends
on each person’s choice.*
 The general purpose of mechanism design is to design games in order to achieve
specific outcomes.
 Market Design :Auctions and matching or assignment problems are in fact special cases
of mechanism design.
<Source:GuillaumeHaeringer,<MarketDesign:AuctionandMatching>TheMITPress,2018>
Game theory, behavioral economics, and market design all allowus to look at rules, and
how people interact with them, understand them, circumvent them, and change them.

GameTheory–MechanismDesign–MarketDesign
Game Theory
The studyof mathematical
modelsof strategic interaction
betweenrational decision-makers
Mechanism Design
How to design
the ‘rule of the game’?
Market Design
A kind of economic engineering,
utilizinggametheory,algorithms,
simulations,and more
’94 : JohnHarsanyi,JohnF. Nash, ReinhardSelten
’05 : Thomas C.Schelling,RobertJ.Aumann
’96 : William Vickrey,James Mirrlees
’07 : Leonid Hurwicz,EricS. Maskin, RogerB. Myerson
’14 : JeanTirole
’12 : LloydS. Shapley,Alvin E. Roth
Reverse
Applied
Behavior
Psychology
Behavior
Economics
Complexity
Economics
Influenced

What is ‘Nash equilibrium’?
<Source:http://studycas.com/component/k2/revisiting-nash-equilibrium-in-prisoner-s-dilemma>
If each player has chosen a strategy and no player can benefit by changing strategies
while the other players keep theirs unchanged, then the current set of strategy choices
and the corresponding payoffs constitutes a Nash equilibrium.
Prisoner's Dilemma – PayoffMatrix

Key Concept of Mechanism Design
<Source:L.Hurwicz&S.Reiter,<DesigningEconomicMechanisms>CambridgeUniversityPress,2008>
The goal function is the main "given", while the mechanism is the unknown.
Therefore, the design problem is the "inverse" of traditional economictheory,
which is typically devoted to the analysis of the performance of a given mechanism.*
Mechanism design is a field in economics and game theory that
takes an engineering approach to designing economic mechanisms or incentives,
toward desired objectives, in strategic settings, where players act rationally.

Key Concept of Market Design
<Source:NirVulkan,AlvinE.Roth,ZvikaNeeman, <TheHandbookofMarketDesign>OxfordUniversityPress,2015>
‘Market Design’ is the term used to refer to a growing body of work that
might also be called microeconomic engineering and to the theoretical and
empirical research that supports this effort and is motivated by it.
Science Art
it applies the formaltools of game
theory and mechanismdesign.
Practicaldesignoften calls for
decisionsthat are beyondthe reliable
scientificknowledgeof the field.

What a Market Needs to Work
<Source:GuillaumeHaeringer,<MarketDesign:AuctionandMatching>TheMITPress,2018>
Market
Thickness
Avoid
Congestion
Make
themarket
safe
• We need ‘enough’ actors from both sides.
• In a thin market, there are few buyers and sellers, which can have negative
effects, such as increasing price volatility or reducing competition.
• Most people prefer to participate in markets that are safe and simple.
• Without proper safety, participants may wish to transact outside of the
market.
• Congestion in a market is like a traffic jam.
• The market must mitigate traffic jams to enable the free flow of
transactions.

Where is Cryptoeconomics useful?
<Source:https://medium.com/l4-media/making-sense-of-ethereums-layer-2-scaling-solutions-state-channels-plasma-and-truebit-22cb40dcc2f4>
ConsensusProtocol
Level
Layer2 Scaling
Solution Level
dApp/
Ecosystem Level
• Economicdesign can helpensurethat userscontribute
resourcesas the foundingteam intended.
• Cryptoeconomicsis also applied to design tokensales or
ICOs.
• The economicmechanismsused by layer 2 solutionstendto
be interactivegames: theywork by creatingincentivesfor
differentpartiesto competeagainstor “check”one another.
• State Channel,Plasma,Truebit,etc.*
• On the contributionsof minerswhomaintainthe blockchain
• On how muchpoweris exertedby those miners
• On how costlythe systemis to run, whichboth influence
whetherusersor apps will want to adopt it

Blockchain Initiatives(Gartner)
New Biz.
Development
EfficiencyPlay
Digital Asset
Market
RecordKeeper
Crypto-Wallet
ID/Authentication
BlockchainDisruptor
(Startup)
Logistics
Crypto-Exchange
SupplyChain
P2PEnergyTrading
RealEstateService
P2PInsurance
DigitalGoldService
CarbonTradingSocialPlatform
HealthRecord
LandRegistry
DigitalVoting
BlockchainCorePlatform
Legacy
Transformation
Short-Term
Value Driven
(Legally approved)
ReduceCost
(Legacy Integrated)
ICO Driven
ReduceFraud
Mid-Term
<Source:PayAttentiontoThese4TypesofBlockchainBusinessInitiatives(Gartner,2018)>

Signs of the new Blockchain World(PwC)
<Source:https://www.pwc.com/gx/en/issues/blockchain/blockchain-in-business.html>
The representation ofreal or virtual assets
on a blockchain is spreading to raw materials,
finished goods, membership rights, and more.
Tokenized Everything
Using blockchainwith theirERP systems,
companiescan streamlineprocesses,
facilitatedata sharing,and improve data
integrity.
ERP + Blockchain
Initial coin offerings,in which a company
sells a predefinednumberof digital tokensto
the public, are a growing alternativeto
classic debt/capitalfunding.
ICOs are the Self-Funding Tech
Accordingto the survey,financialservices
are the currentand near-termfutureleader
of blockchain,but also thereare potentialin
energyand utilitiesand healthcare.
New Leaders Emerge

What is Asset?
<Source:https://en.wikipedia.org/wiki/Asset>
 In financial accounting, an asset is an economic resource.
 Anything tangible or intangible that can be owned or controlled to produce value
and that is held by a company to produce positive economic value is an asset.
 Assets represent value of ownership that can be converted into cash(although cash
itself is also considered an asset).
• CurrentAssets: Cash and cash equivalents,
Inventory,Prepaid expenses
• FixedAssets: land, buildings,machinery,
furniture,tools, IT equipment
Tangible Assets
• Goodwill, copyrights,trademarks, patents
and computerprograms,etc.
• Financialassets, including suchitemsas
accountsreceivable, bondsand stocks, etc.
Intangible Assets

Asset backed Tokens
<Source:https://en.wikipedia.org/wiki/Property_rights_(economics)>
Property
(Asset)
Rights
Right to Earn Income
from the Good
Right to Enforce
PropertyRights
•Needto be RegisteredLegally
•Profit isDivided
Security
Token
Utility
Token
Right to Transfer
the Good to Others
Right to Use and
Occupythe Good
•TimesharewithoutOwnership
•AccessisControlledby Contract
-Tokensaredigital
representationsofreal-
worldassets,arethus
backedbythem
-Rightsaregratedtothe
tokenholders.

Tokenizing assets : 60+ blockchain startups
<Source:http://researchly.leobosankic.com/2018/06/29/blockchain-companies-tokenizing-the-real-world>
RealEstate Realisto, Bitproperty,DomusCoins,imbrex, Brickblock
Utilities WePower Network, water.bankex
Commodities OneGram, Orocrypt,DigixDAO,ChainTrade,Smartlands, GoldMint
People TokenStars
Collections:Artandtradingcards Maecenas,Ether Legends
MediaandApps:Financingmovies,
Instagramaccounts,Apps
MovieCoin,AppToken,MEDIATOKEN
Traditionalfinancialassets Blackmoon Crypto,Smartlands, Dharma, CoinLoan,BlockchainCapital

Benefits of Asset tokenization
<Source:https://www.linkedin.com/pulse/asset-tokenization-using-blockchain-new-trend-2018-stan-pearson>
 Liquidity of assets / Liquidity Premiums
 New economic models around asset ownership, such as fractional ownership.
 Diversification of risk arising out of asset ownership
 Eliminating temporal/territorial barriers for asset owners for attracting investments
 Reducing entry barriers for trading and investing
 Newer models of raising capital, by allowing projects that are under development
to issue shares in form of tokens to finance project development
 Utilizing network effect for certain products to increase their popularity in the
market, by providing direct financial incentive to fractional owners
 Reducing administrative expenses

Asset Tokenization Cases &
Democratization of Investment

Crowdvilla : $24,900,000 in properties’ contributions
<Source:https://crowdvilla.io>

Crowdvilla : Model Overview

Crowdvilla : Token Point System
 Each Crowdvilla Token(CRV) denotes a share of time-value for the use of all properties
in the Crowdvilla portfolio.
 CRV holders earn Crowdpoint Tokens(CROWD) in perpetuity(i.e. on an ongoing basis for
as long as the portfolio exists).
 CROWDTokens are used to book stays in the properties.
 The number of CROWDTokens generated is proportional to the number of CRV Tokens
held and the length of the holding period.

Primalbase : Mission & Business Model
<Source:https://primalbase.com>
Primalbase is transforming traditional office rental and creating a next-generation
community-based ecosystem where it is possible to share, sell or rent out high-quality
working spaces using Ethereum and Waves-based digital tokens.

Primalbase : Workspaces
<Source:https://primalbase.com>
Tokenpossession provides unlimited lifetimeaccessto all Primalbase workspaces.
• 1 PBT— 1 workspacefor 1 person at any location.
• 4 PBT— 1 private office for max.2 weeksdependingon its availability

Tokenestate : Tokenization as a Service for Real Estate Funds
<Source:https://tokenestate.io/index.html>
 Tokenestate provides an end-to-end
solution for real estate fund managers
to tokenize their fund, issue their own
real estate tokens in form of
cryptosecurities and access to a large
pool of retail and institutional
investors.
 Tokenestate will take care of all legal
aspects, required technical solutions
and the fund raising process.

Tokenestate : Conceptual view of Tokenestate.io, TEIVs & RETOs
<Source:https://tokenestate.io/Tokenestate_io_Whitepaper.pdf>

Bitproperty : Vision
<Source:https://btptoken.io/en>
 Bitproperty is a decentralised real estate
platform powered by Ethereum smart
contracts.
 Bitproperty has two types of token: the
BTP platform token and individual
property asset tokens.
 BTP tokens represent the inherent value
of the platform and provide holders with
income from transaction fees within the
platform in proportion to the amount they
own.

Bitproperty : Offering Projects
<Source:https://btptoken.io/en>

BANKEX : Operating system for capital markets
<Source:https://bankex.com/en>
• BANKEXis developing atokenizationecosystem,providing technology/servicesat everystage.
• BANKEXbrings bank-as-a-serviceand blockchaintogetherto transformcapital markets.

Problems and Challenges
<Source:https://www.linkedin.com/pulse/asset-tokenization-using-blockchain-new-trend-2018-stan-pearson>
Trustedissuers
• Asset backedtokensneedto be based on the certaintythat using the tokensin
any future point of the time, the participants can redeem their real-world assets.
Regulatory
Vacuum
• Currentlythere is regulatoryvacuumover a big numberof questionsof how will
this space shall be regulated.
Legalenforceability
ofpropertyrights
• The fundamentalquestionis whetherowningtokensconfersownershipover the
correspondingasset.
Digitalidentityand
KYC/AML
• Digital ID marketplaceneedsto be integratedinto the tokenizationplatforms
that meetthe stringentstandardsof biggestregulatorybodies, such as SEC.
Assetvaluations/
rating
• Thereis a needof trustedintermediariesand oraclesto provide such valuation
and rating data on asset backedtokens.

Integral Blockchain & Crypto Governance

What is Integral Technology?
<Source:http://iflas.blogspot.kr/2018/04/integral-technology-in-blockchain.html?m=1>
 Technologies need to be more
internally and externally coherent.
 Internal coherence describes how
their design does not undermine the
intention for their creation.
 External coherence describes how
their design does not undermine the
social and political system that they
depend upon and which holds
technologies.
StakeholderAccountability
 Intended Safety
OptimalAvailability
Avoiding Externalities
Meaningful Purpose
Managing Externalities

The Need of ‘Blockchain for Good’
<Source:https://www.weforum.org/agenda/2018/04/blockchain-survive-backlash-social-purpose-jem-bendall>
 Is it appropriate for people seeking economic justice and equal opportunity
to use a Blockchain in which only heavily invested actors receive new tokens?
 Is it appropriate for those seeking to put a new medium of exchange in the hands of
the masses to use a Blockchain whose tokens are mostly hoarded by speculators?
 Is it appropriate for a carbon emissions reduction project to use a blockchain
which emits as much CO2 as a small country?
Most Blockchain projects bolt a purpose onto code and governance systems
that were designed without public interests in mind.

What is Integral Blockchain?
<Source:https://www.weforum.org/agenda/2018/04/blockchain-survive-backlash-social-purpose-jem-bendall>
‘Integral Blockchain’ initiatives aligns its codebase and internal governance
with positive social and environmental outcomes.
These projects strive to be an integral part of a healthy society,
rather than ends-in-themselves.
Meaningful Services to Humanity

From Authority to Governance
Decentralized platforms, like those that utilize blockchain technology are complex economic
system that require rigorous design because they lack authority.*
On decentralized platforms, authority has to be replaced by incentives and other mechanisms.
<Source:https://prysmgroup.attach.io/B1KdY0dEm?viewer=new>
(Bureaucratic)
Authority
Rule of Office
BureaucraticPaper-basedSystem
(Algocratic)
Governance
Rule of Code
TechnologicallydrivenCode-basedSystem

Code as Law
<Source:PrimaveraDeFilippi,‘BlockchainandtheLaw’,2018>
『LEX Cryptographica』
‘Autonomous’ Code-based Rules
“By relying on blockchain technology,
governments could regulate society more efficiently
by reducing the costs of regulatory compliance and law enforcement, automating laws,
while simultaneously reducing the degree of uncertainty that is inherent in the legal prose.”

Crypto Constitutionalism
<Source:https://medium.com/cryptoeconomics-australia/crypto-constitutionalism-c25d0c503ac>
Rule-Systems in which
individuals(or firms, or algorithms) can make economic and political exchanges.
 Blockchains have systems of governance.
 Blockchains look a lot like countries.
 They have currencies(tokens), property(digitalassets), laws(protocols),
corporations(DAOs), and security systems(proof-of-work, or proof of stake, or
delegated byzantine fault tolerance, etc.).
Blockchains are constitutional orders!

“Omnia Sunt Communia”
- Thomas Müntzer(1489 – 1525)

Socio Economic Transformation through Radical Decentralization

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