There Will Be More Tokens. Not Less. Here’s Why.

According to CoinMarketCap, there are over 6,000 crypto tokens in existence today. That is about 35 times more than all the different fiat currencies in the world.

The question many people ask is: why are there so many of them? Just 12 years ago there was only Bitcoin, and now there is at least one token with some function in virtually every sector of the economy. Is this sustainable?

Bitcoin maximalists are quick to point out that many new tokens that launched to great fanfare have only failed and faded over the years. While many such individuals have predicted the death of new token issuance, they couldn’t be more wrong. If the past five years are anything to go by, the next five years will lead to more token networks, not less.

Decentralized software is eating its centralized counterparts, and we are witnessing an ever increasing explosion of startups that build decentralized versions of Web 2.0 platforms and services. These Web 3.0 ecosystems will be open source, permissionless, and supported by token economies.

To understand the future of the token economy, one needs to understand how the concept of trust on the internet has changed from Web 1.0 to Web 3.0. Let’s dive in.

Web 1.0 — Open standards

In Web 1.0, the early protocols of the internet like IP, SMTP and HTTP were designed with a spirit of openness and inclusiveness. Open standards meant that anyone, anywhere had the ability to build on top of existing open-source software without anyone’s permission. Because these core protocols were open-source, nobody could take unilateral control over them. The problem, however, was that open source was hard to monetize, so the business model of these startups depended on building private, closed protocols on top of the Internet’s open ones. This led to the platforms and tech giants of Web 2.0.

Web 2.0 — Proprietary networks and monetization

In Web 2.0, tech giants became the trusted intermediaries and gatekeepers of the Internet. Everything we do on the Internet today, like searching the web, connecting with people, storing files, and socializing with friends requires us to place trust on private and opaque code written by these companies. As a result, the tech giants now command a great deal of power over their users and third-party developers. At any time, without warning, these companies can (and oftentimes do) change just about any aspect of what is allowed and not allowed on their platforms, frequently at the expense of smaller companies and users. We’ve all seen the headlines.

Web 3.0 — Open networks and monetization

In Web 3.0, the emphasis has shifted towards empowering network participants rather than companies. Startups leverage peer-to-peer open-source technology and blockchain to make the Internet more open, decentralized, and censorship-resistant, much like Web 1.0 did. With the advent of Ethereum, complete strangers can interact via mathematically verified smart contracts without the need for mediating authorities.

Smart contracts can be put together in novel ways to create decentralized versions of Web 2.0 platforms and products: Platforms like Uniswap, Compound, and Aave are addressing inefficiencies in traditional finance and banking. Platforms like Filecoin and Swarm are creating decentralized storage marketplaces that compete with AWS. Crypto-powered games like Axie Infinity, CryptoKitties, and Gods Unchained are giving users true (fully liquid + tradable) ownership over in-game objects, a stark difference to tradition games like Fortnite where 100% of in-game units are owned by Fortnite, not its users. It is only a matter of time before composable smart contract building blocks are reassembled and applied to even more complex verticals like search engines and social networks.

Tokens enable the creation and monetization of open services

All these new applications, use cases, and verticals will be powered by token networks that enable 1) the creation of open, decentralized networks and 2) new ways to incentivize network participants including users, developers, investors, and service providers. Token networks reverse the centralization and rent-seeking nature of the internet. And while tokens related to open protocols will continue to flourish, there will also be social tokens and creator tokens that allow brands, communities, and individuals to expand and diversify their business models and monetization strategies.

Moreover, well-designed token networks include an efficient mechanism to incentivize network participants to overcome the bootstrap problem that hampers traditional network development, penalize malicious behavior, and work towards a common goal — the growth of the network and functionality of the tech stack. In effect, they combine the societal benefits of open protocols of Web 1.0 and the financial benefits of proprietary networks of Web 2.0.

As more entrepreneurs and developers build decentralized versions of Web 2.0 software supported by token networks, the internet will become a more fair and accessible place. It is worth noting however that not all Web 2.0 platforms will have decentralized competitors as some use cases (ie healthcare platforms) are simply better suited for Web 2.0 than Web 3.0.

Composability = innovation = more token networks

Another key factor that will contribute to the increasing number of token networks is a concept called composability. Because smart contracts can be programmed to interact with one another, they make crypto composable, like legos or building blocks. This allows developers to bootstrap their own projects and communities without having to build everything from scratch. Because smart contract platforms like Ethereum and Solana are massive, open sandboxes, developers of spin-off projects benefit from a built-in audience and network effects. Many DeFi projects, for example, were built using a combination of multiple other DeFi applications and building blocks. And because the composable nature of open source software allows anyone to take existing programs and adapt or build on top of them, it will unlock completely new use cases and token networks that don’t yet exist.

There will be more tokens. Not less.

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