Rethinking Cryptoeconomics - Part 5: A Post-Capitalist Critique of Tokenomics
Rethinking Cryptoeconomics - Part 5: A Post-Capitalist Critique of Tokenomics
Navigating the crossroads of innovation and inequality in blockchain economics.
Tokenomics, the economic principles and practices governing the issuance and management of digital tokens in blockchain ecosystems, has revolutionized how we perceive value and ownership in the digital realm. However, it's increasingly evident that many of the predominant token standards, trends and practices, such as yield farming and liquid staking, are steeped in capitalist ideologies of accumulation, rational mastery and relentless growth. The focus on market capitalization, token supplies, and practices like token burning underscores a reductionist view that prioritizes financial gains over communal benefits. This approach often sidelines the transformative potential of blockchain for societal good, favoring short-term profits.
This segment of my series on “Post-Capitalist Cryptoeconomics” takes a critical look at tokenomics, from abstract token standards to the concrete real-world asset tokenization.
My critique aims to unpack the capitalist underpinnings of these tokens—their impact on social relations, protocols, and the physical world—and envision a pathway towards a more equitable, sustainable, and communal blockchain ecosystem. To set the stage, it is useful to review some of the more popular token standards.
Tokenization: Towards the Commodification of Everything
ERC standards, short for Ethereum Request for Comments, are technical protocols established within the Ethereum blockchain ecosystem. They serve as guidelines and specifications that developers follow to ensure interoperability and consistency across different applications and tokens on the Ethereum network. These standards play a crucial role in the development and functioning of decentralized applications (dApps) and assets on Ethereum, fostering a vibrant ecosystem of blockchain-based innovations.
Some of the most widely used Ethereum token standards include ERC-20, ERC-721, ERC-1155 and ERC-4626. They have helped lay the foundation for a burgeoning ecosystem of digital assets, including fungible tokens, non-fungible tokens (NFTs), and yield-bearing vaults. While they have facilitated unprecedented innovation and diversity in token creation and management, they also embody and perpetuate the capitalist dynamics of accumulation, speculation, and inequality, often at the expense of the entire network.
Let’s review these standards in a bit more detail, from a post-capitalist perspective.
Motivated by the need to allow “any tokens on Ethereum to be re-used by other applications: from wallets to decentralized exchanges,” the ERC-20 standard, with its emphasis on fungibility, transforms digital assets into interchangeable units of value, akin to traditional currencies. This standardization has streamlined the creation and exchange of tokens, fostering liquidity and accessibility in the crypto market such that today there are around half-a-million ERC-20 tokens across all EVM (Ethereum Virtual Machine) based chains. Tokens such as USDT, USDC, Wrapped Ether (WETH) and Wrapped BTC (WBTC) are just a few of these tokens accounting for more than 6 billion in trading volume over a 24 hour period.
This basic form of tokenization has enabled widespread speculative trading practices that prioritize profit over the intrinsic utility of digital assets, contributing to market volatility, network congestion, and the commercialization of digital interactions.
ERC-721: Individuality at a Price
The creation of the ERC-721 standard for Non-Fungible Tokens (NFTs) represented a significant milestone. However, from a post-capitalist perspective, it also epitomizes the inherent contradictions and challenges of current tokenomic practices.
ERC-721 allows for the unique representation of digital and physical assets. As the standard’s author’s put it:
“NFTs can represent ownership over digital or physical assets. We considered a diverse universe of assets, and we know you will dream up many more:
Physical property — houses, unique artwork
Virtual collectibles — unique pictures of kittens, collectible cards
“Negative value” assets — loans, burdens and other responsibilities
In general, all houses are distinct and no two kittens are alike. NFTs are distinguishable and you must track the ownership of each one separately.”
While ERC-721 was revolutionary, it paved the way for a rampant commodification of digital assets and introduced digital scarcity. NFTs, initially heralded as a means to democratize ownership in the digital world, have eroded the democratic ideals of blockchain as they have increasingly become tools for speculative investment and capital accumulation. The essence of unique digital or physical assets being tokenized and traded has shifted the focus from the intrinsic value of these assets to their market-driven price tags.
The speculative frenzy around NFTs often overshadows their potential to empower creators and artists, instead benefiting a small group of financially affluent individuals and entities. This trend contradicts the post-capitalist vision of a more equitable and democratic digital ecosystem.
ERC-1155: Efficiency Over Equity
The ERC-1155 standard, designed for efficiency in trading and bundling transactions, represents a significant technical advancement in the tokenization of digital assets, allowing for the creation of both fungible and non-fungible tokens within a single contract. While this efficiency reduces transaction costs and enhances liquidity, it also accelerates the commodification and speculative trading of digital assets, further entrenching capitalist market dynamics within the blockchain ecosystem.
ERC-4626: Yield Optimization or Financialization?
The ERC-4626 standard, aimed at optimizing yield-bearing vaults, epitomizes the financialization of the blockchain space. By standardizing the technical parameters of yield generation, it facilitates the creation and management of complex financial instruments. While this can democratize access to yield-generating opportunities, it also risks replicating the speculative and exclusionary practices of traditional finance, prioritizing profit maximization over the collective well-being of participants.
Reimagining of Token Standards
A post-capitalist critique of these token standards calls for a fundamental reevaluation of their design and implementation, with an emphasis on fostering equity, sustainability, and community within the blockchain ecosystem. This entails:
Promoting Equitable Distribution: Token standards should incorporate mechanisms that prevent excessive accumulation and encourage a more equitable distribution of assets, challenging the capitalist imperative of accumulation.
Fostering Communal Ownership and Governance: Exploring models of shared ownership and participatory governance, particularly for unique digital assets and cultural works, can help counteract the individualistic and speculative tendencies fostered by current standards.
Prioritizing Utility and Sustainability: The development and adoption of token standards should emphasize the intrinsic utility and sustainability of digital assets, rather than create scarcity and potential for speculative gain, encouraging a shift from profit-centric to value-centric tokenomics.
Enhancing Transparency and Accountability: Implementing standards that ensure transparency in the creation, distribution, and management of tokens can foster a more accountable and trust-based ecosystem, counteracting the opacity and speculation prevalent in current practices.
Overall, the ERC token standards have undeniably contributed to the growth and diversification of the blockchain ecosystem. But, as I will demonstrate in the section on real-world asset tokenization below, it is likewise undeniable that their development and application within a capitalist framework have reinforced dynamics of commodification, speculation and inequality, not just in the digital realm, but now reaching into the physical world more broadly.
Now that we have reviewed some of the basic token standards, let’s turn to look at how tokenomics is used to secure the network.
Restaking: Commodifying the Network
Restaking represents an innovative approach within the blockchain ecosystem, aiming to enhance network security and scalability by enabling token holders to restake their assets on validators. This method, while technologically advanced, invites a post-capitalist critique focused on its implications for equity, communal governance, and the potential reinforcement of existing capitalist dynamics within decentralized networks.
Centralization of Power and Wealth
At its core, the restaking model allows token holders to leverage their existing assets to support network validators, ostensibly democratizing the validation process by broadening participation beyond traditional validators. However, from a post-capitalist perspective, this mechanism risks centralizing power and wealth among those already holding significant tokens. For example, where there are limits on restaking they are unreachable by the vast majority. The EigenLayer protocol, for instance, had set their re-staking limit under 120,000 ETH, but in December 2023 raised its limit to 500,000 ETH, about $1 billion USD at today’s rates. EigenLayer intends to raise these limits progressively, “with the goal of reaching an open and uncapped state where any user can restake any amount of staked Ether.”
By enabling the wealthy to accumulate more influence through restaking rewards, such models may inadvertently reinforce existing economic inequalities within the blockchain ecosystem, contradicting the decentralization ethos that many blockchain projects aspire to.
The Commodification of Security
The restaking mechanism commodifies network security by making it an asset that can be augmented through capital investment. While this can enhance network performance and security, it also transforms these fundamental aspects into commodities traded and accumulated by individuals seeking profit. This commodification process prioritizes financial capital over collaborative, community-driven efforts to maintain and secure the network, potentially sidelining smaller participants who cannot afford to restake large amounts of tokens.
Impact on Communal Governance
The ability to restake and thereby accumulate more significant rewards and influence can impact communal governance structures within blockchain networks. If decision-making power becomes concentrated among a few large restakers, the democratic governance models that many decentralized projects strive for could be undermined. This concentration of power challenges the principle of equitable participation, as it places disproportionate control in the hands of those with substantial financial resources, sidelining the collective voice of the broader community
Toward a More Equitable Restaking Model
Addressing these critiques requires rethinking the restaking model to align more closely with post-capitalist ideals of equity, community, and sustainability. Potential approaches could include:
Implementing Caps and Thresholds: Introducing caps on restaking rewards or thresholds for participation could help prevent excessive accumulation of power by large token holders, ensuring a more equitable distribution of influence and rewards.
Enhancing Community Governance: Developing mechanisms that increase the influence of smaller stakeholders in governance decisions, ensuring that the restaking model does not disproportionately benefit large token holders at the expense of broader community engagement.
Promoting Sustainability: Focusing on the long-term sustainability of the network by incentivizing restaking practices that support ecological and social goals, rather than purely financial ones.
Transparency and Accountability: Ensuring that the restaking process is transparent and accountable to all network participants, fostering trust and collaboration across the ecosystem.
Restaking protocols such as EigenLayer's, while innovative, raises important questions about equity, power distribution, and communal governance within the blockchain space. A post-capitalist critique rethinks this restaking approach. It is possible to envision a system that balances innovation with the collective well-being of all participants, aligning more closely with the foundational principles of decentralization and community governance.
Now that we have reviewed token standards and restaking at the protocol level, let’s turn to look at how tokenization is being applied to the physical world.
“Real-World Asset Tokenization”: Everything Up for Sale
The trend of real-world asset (RWA) tokenization represents a significant shift in the blockchain and financial industries. Building from the abstract ERC token standards assessed above, they promise to bridge the gap between physical assets and digital finance. By tokenizing real-world assets—ranging from real estate and art to commodities and financial instruments—this movement aims to enhance liquidity, transparency, and accessibility in markets traditionally dominated by institutional gatekeepers. However, from a post-capitalist perspective, RWA tokenization also raises critical concerns regarding the perpetuation of capitalist dynamics, potential exacerbation of unequal wealth distribution, and the commodification of essential resources and cultural artifacts.
Commodification and Market Dynamics
At the heart of RWA tokenization is the commodification of assets, transforming tangible and intangible goods into tradable tokens on blockchain platforms. This process extends the problems identified in the various ERC token standards, subjecting these assets to market dynamics, including speculative volatility, often detaching the value of the token from the intrinsic value of the asset itself. Such commodification is another instance of tokenomics that risks prioritizing financial gain over the social, cultural, or ecological significance of assets, undermining community ties to land, heritage, and natural resources.
Accessibility vs. Inequality
While proponents of RWA tokenization argue that it democratizes access to investment opportunities, allowing individuals to own fractions of previously inaccessible assets, this potential is tempered by the realities of market participation. The digital divide, financial literacy, and existing wealth disparities may limit the ability of marginalized and lower-income individuals to benefit from such opportunities. Consequently, RWA tokenization could inadvertently reinforce or even exacerbate existing inequalities, concentrating wealth and ownership further among those already financially privileged.
Financialization of the Commons
The tokenization of real-world assets extends the financialization process to nearly all aspects of life, including natural resources, cultural heritage, and even social relationships. This trend risks treating these commons and shared goods purely as economic resources to be expropriated and exploited for profit, rather than as communal or ecological assets to be preserved and cherished. The logic of the market, when applied indiscriminately to all forms of assets, can lead to the erosion of the commons and the prioritization of short-term gains over long-term sustainability and community well-being.
Toward a Post-Capitalist Approach to RWA Tokenization
A post-capitalist critique of RWA tokenization calls for a reimagining of this trend to prioritize equity, sustainability, and communal governance. This involves:
Equitable Access and Distribution: Implementing frameworks that ensure equitable access to the benefits of RWA tokenization, preventing the concentration of wealth and fostering a more inclusive economy.
Community Governance: Empowering communities and stakeholders in the governance of tokenized assets, particularly those with cultural, ecological, or social significance, to ensure that decision-making reflects collective interests rather than solely financial incentives.
Sustainable Practices: Prioritizing the long-term sustainability of tokenized assets over short-term profit, including ecological considerations and the preservation of cultural heritage.
Transparency and Accountability: Ensuring that the processes of tokenizing, trading, and managing real-world assets are transparent and accountable to all stakeholders, safeguarding against exploitation and unethical practices.
Real-world asset tokenization stands at the crossroads of technological innovation and capitalist expansion. While it offers the promise of increased liquidity, efficiency, and liberal democratization, it also poses significant challenges in terms of inequality, commodification, and the financialization of the commons. A post-capitalist critique emphasizes the need for a critical reassessment of this trend, advocating for approaches that place equity, community, and sustainability at the forefront of the tokenization process. By addressing these concerns, it may be possible to harness the potential of blockchain technology for the collective good, creating a more equitable and sustainable future for all.
Conclusion
This exploration of tokenomics through a post-capitalist lens reveals deep-seated contradictions within the blockchain's innovative facade. The critique of Ethereum token standards, restaking mechanisms, and the trend of real-world asset tokenization underscores a broader narrative: the pervasive influence of capitalist ideologies in shaping the digital economy. These mechanisms, while pioneering in their technical achievements, often entrench existing patterns of accumulation, speculation, and inequality, counteracting the blockchain's potential for fostering a more equitable and sustainable societal framework.
To harness the revolutionary potential of blockchain technology, this series has advocated a pivot towards a post-capitalist paradigm that champions communal well-being, equitable access, participatory decision-making, ecological well-being and the intrinsic value of both digital and real-world assets. This future vision requires not only technological innovation but a radical reimagining of economic principles to create a physical and digital world that is equitable, sustainable, and reflective of communal aspirations.
delegat0x is a libertarian anti-capitalist R&D Engineer in the crypto space. They write about the intersections between philosophy, politics, media, alternatives to capitalism, social movements, and collective autonomy.