May 20, 2024 - Economy

🪙 The why of coins and tokens

Illustration of a question mark within a pixel coin drawn on a chalkboard.

Illustration: Lindsey Bailey/Axios

OK, you might be thinking, those things sound fine, but why do these projects need to pay participants in these networks in magic space money?

  • Why not just actually pay them?

The answer: Because tokens allow participants in the network to share ownership and risk.

Example: Let's imagine I wanted to start a company to measure water levels and flows in bodies of water (rivers, lakes) all over the world. So I create specs for devices and software to do it well.

  • I manufacture some but I also open-source it all so that other people could build similar devices to spec, right?
  • One option: I could try to raise money, but it would be impossible to know how much would be needed and investors might not bite.
  • Direct payment also means that the only upside for my contractors is whatever they get paid. As soon as the money runs out, they are out. Which also means they have no more incentive beyond that to do work that's just good enough.

Enter, tokens: With tokens, I can make money basically for free, and at first it's worth nothing on the open market. But anyone who shares the vision of this network of gauges can share the risk with me.

  • They can set up monitors, earn tokens that have no value now but hope they will be worth a lot when the network becomes valuable.
  • So then later when people are paying in that same token to access the data set, the tokens my workers earned early on will be worth much more.

The gist: With cryptocurrency, we can both share in the upside of the network, even though we have no idea how far it will go.

This has already worked. It worked for Bitcoin, which paid people to break little chunks of encrypted records of transactions in hope that the world would eventually decide that work was valuable. And it has.

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