Introduction

Tokens are to the Web3 what websites were to the Web1. With the emergence of the WWW in 1991, Tim Berners-Lee introduced a new standard that allowed us to create visually appealing web pages with just a few lines of code, and surf the Internet following links, instead of using command-line interfaces. Back in the early 1990s, most people did not know how to code HTML, or how to create appealing, meaningful, user-friendly websites. It took us almost a decade to figure out how to use webpages beyond the scope of online directories and online billboards, and when we did, the Web2 emerged. Compared to those early days of the Web, we are at a very similar stage when it comes to understanding what we can potentially do with cryptographic tokens. While it has become easy to create a token with a few lines of code, the understanding of how to apply these tokens is still vague. Even though there are already more than 5400 publicly traded tokens listed on “Coinmarketcap” at the time of writing this book, most of these tokens still lack proper design; many of these might, therefore, soon fail simply because of that.

The technology is still in its early stages, rapidly evolving, with the potential to uproot many industries, in particular money and finance, including government and governance. However, we currently lack best practices, while simultaneously dealing with a myriad of technological and legal challenges. We also lack substantial education around the mechanisms, potentials, threats, and state of the technology, including its socio-economic implications.

Buzzwords like “smart contracts,” “cryptocurrencies,” and “tokens” add to the confusion of what is what. Partial and one-sided knowledge seem to be on the rise, but the big picture of why and how Web3 networks could prove to be one of the biggest game-changing innovations in the years to come is still vague. The media keeps referring to cryptocurrencies, even when talking of non-currency tokens, while reducing the underlying blockchain networks to objects of speculation, instead of focusing on the fact that they provide - first and foremost - a promising governance infrastructure that could resolve many problems of the Internet we use today, such as: (a) the fact that we have no control over what happens with our private data, (b) the lack of transparency along the supply chain of goods, services, and financial payments, or (c) the fact that the Internet lacks an inherent payment settlement layer, forcing us to rely on trusted Internet platforms such as Amazon, Airbnb, or Uber.

The industry keeps referring to “Blockchain” as different from “Bitcoin,” creating an artificial divide that is often misleading. There seems to be too little understanding about the fact that Bitcoin is a blockchain network, which is (a) globally managed by people who mostly do not know each other, and (b) enabled by the consensus protocol that (c) incentivizes all network actors for their contributions with a native token. The governance rules are tied to the minting of a native blockchain token. The Bitcoin token can, therefore, be seen as the currency of a distributed Internet tribe, called the Bitcoin network, where network actors are rewarded with Bitcoins, just as the Ether is the currency of the distributed Internet tribe Ethereum network, or Sia is the native currency of the Sia network. The Bitcoin network and other distributed ledgers all represent a collectively maintained public infrastructure and are the backbone of the next generation Internet, what the crypto community refers to as the Web3.

While early tokens were first only minted as part of the incentive scheme of the underlying blockchain protocols, with the advent of the Ethereum network, tokens have moved up the technology stack. Ethereum made it cheap and easy to issue a token with just a few lines of code, with a simple smart contract, and without the need to build your own blockchain infrastructure. The challenge, however, is that most people still don’t know what to do with these tokens, or how to properly design them. Other challenges are: technological challenges, sustainable mechanism design for purpose-driven tokens, unclear and balkanized legislation, and the lack of education about the potentials and threats of this emerging “token economy.”

The goal of this book is, therefore, to first give an overview of the fundamental building blocks of the Web3 (Part 1) and introduce the most important Web applications such as smart contracts, DAOs and Token with focus on their socio-economic implications (Part 2). Part 3 will deep dive into the implications on money, finance and the economy and explain how Web3 based decentralized financial applications - colloquially referred to as DeFi - lead to the merging of the concept of money, finance and the real economy. Part 4 will analyze selected use cases and conclude with a hands on guide to “how to design your own token system.”