Each will be considered in turn, both diagrammatically and with text. Figure 10.1 contains the visual elements that are components of all diagrams.

[https://ipfs.io/ipfs/QmXyA5ZypX11W1DeGRvTd4AmByerpq2WVDXXbN83UdopyL?filename=10.1.png]

Figure 10.1 Visual elements representation legend

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STAKE TOKENS

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Stake involves asset ownership capacities of participation in performances and exposure to dividends (yields) on performances. Reciprocal staking is a two-way economic communication interface, through which credit, commodities or other stake can be distributed throughout the network. As a process, reciprocal staking binds the network in on-going common interest. Stake tokens, issued to represent the transferred ownership of stake, perform the following roles:

- _Sharing the risks._ Risks of asset ownership have both an upside and downside. A transfer of stake involves one agent’s acquisition of a share in the performance of another agent for purposes of both:

» short stake-diversification positions. As each purchase of a stake token requires an issuance of stake by that purchaser, there is a hedging process for all agents to diversify their own risks, generating liquidity in the stake market.

» long performance-focusses positions. This could be called ‘commitment staking.’ Agents invest stake in those agents whose performances are likely to create future value in the network.[141]

- _Providing collateral for credit_. This enables shared liquidity. Stake-as-collateral means an agent can secure access to credit (liquidity) without having to exit their stake position.

- _Offers and dividends._ Stake tokens give the right to nodes in the network to receive offers from an issuer and, most importantly, to receive dividends.

[141] Readers who see this proposition as reminiscent of Keyne’s critique of stock market speculation (trades motivated by ‘other people’s opinions’) are invited to see Appendix 12.3.

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Stake tokens have the following attributes:

- They are issued and accepted by agents in return for the stakes of others.

- They are financial positions on the future and a means to diversify the risks of ownership.

- They are a measurement of the aggregate performance of an economic agent.

- Their price is measured in the unit of exchange, and is reflected in the matched exchange offers. That price will reflect the valuation of the asset being staked, and will change broadly in relation to that valuation.

- They give voice to agents’ decisions about what constitutes ‘value’ and where in the network it is best being created.

- They create performance data about the state of the economy.

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The stake issuance process is shown in Figures 10.2 to 10.4.

[https://ipfs.io/ipfs/QmcV2m9mWXWWQicSfxiCaw33EDmowdVcLhvEMQBU7BcsWz?filename=10.2.png]

Figure 10.2 Agent A publishes stake exchange offer to the network, proposing 500B for 900A

[https://ipfs.io/ipfs/QmYheXipLYBCLChAkC5JzhAvDmZ3A73Nj4n3FQcn5f4bpK?filename=10.3.png]

Figure 10.3 The network matches A’s stake exchange offer

[https://ipfs.io/ipfs/QmZKCfkdXrbAFgg2zSKVEK3R8EnoYbETY9LREsYssVPokp?filename=10.4.png]

Figure 10.4 Agent A holds 500B and the network holds 900A

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LIQUIDITY TOKENS

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In a distributed economy the offer-as-line-of-credit is the starting point and reciprocal token issuance is its appearance.[142] In exchange, when the offer is published, it becomes a line of credit, whether it be in the form of commodity credit (an offer to deliver output in the future) or financial credit (an offer of liquidity). Hence the offer stands as an option on credit proper. The right to exercise the option – to draw down on the line of credit by accepting the offer of credit – is itself a form of liquidity. In summary, the offer is liquidity, and the matching of that offer brings the liquidity token into being.

[142] Economic textbooks want to explain money via a logical evolution from barter, and the growing complexity of economic transactions enabled by money. Anthropologists are inclined to emphasize the origins of trade in credit and the gift, bringing focus to the time interval in trade.

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The incentive to issue liquidity tokens is the recognition that scaling transactions and complex networks will not work without intertemporal smoothing. This frames liquidity token offers as a social act of reciprocity: a contribution to keeping the wheels of commerce turning.

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The Economic Space Protocol implements a ‘network credit agreement’ (with stake as collateral). A credit agreement is an automated ‘topping up’ of credit: when any credit is cleared by an act of exchange of liquidity tokens, the line of credit is topped up to its agreed limit. This ensures that credit offers are a constantly-adjusting stock, enabling credit itself to manifest as a flow. Credit tokens bear no interest or yield; nor are they an effective store of value.[143]

[143] Credit tokens are not designed to store value; indeed with no yield, their main risk is downside: the risk of default of the issuer. Default would be the event of the issuer not being able to provide/create its outputs, and not necessarily because of insolvency. For as long as an issuing agent creates value, the markets will adjust both the price of the offer and the reputation rating of the agent, indeed to the point that the agent may be no more than an issuer of credit. But as long as there is any demand for its commodity tokens, liquidity tokens will be matched until cleared.

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Liquidity tokens have the following attributes. They:

- Are denominated in the unit of exchange: credit clearing may only occur across entities of the same kind and denomination. In effect, liquidity tokens bring the unit of exchange to life as more than a passive numeraire mediating the valuation of other tokens: it becomes _a unit of distributed issuance of credit._

- Come into being through a collateralized credit agreement. This means credit issuance effectively appears as automated.

- Are cleared when they serve an exchange. This is through netting by the distributed offer matching algorithm.

- Give a right to be redeemed on demand for any output on offer by the issuing economic agent, or to clear outstanding credit in the opposite direction.

- Are not held longer than necessary to settle a trade.

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Credit relationships will be of two general types:

- _Credit issuance._ This is token issuance between agents directly involved in exchange of commodities or stake, giving the liquidity required to initiate exchange. This credit will generally be initiated to bring an act of production into being; for example to enable a producer to acquire inputs. It is presented diagrammatically as a _credit granting exchange offer,_ represented in Figures 10.5 to 10.7.

- _Distributed clearing._ This token issuance is generated ‘automatically’ in the netting process, to enable an intertemporal match. It is automatically closed out once the ledger is settled. It is presented diagrammatically as a _credit clearing exchange offer_, represented in Figures 10.8 to 10.10

[https://ipfs.io/ipfs/QmQhiL92P7xx76tD81GQcHq53pCxn3zpWBjUq6xLMUbwoN?filename=10.5.png]

Figure 10.5 An agent makes the network an (issuing credit) offer to exchange commodity X for liquidity tokens

[https://ipfs.io/ipfs/QmWyrDHKnFQe6VpEgvxSa7FL7nr4pZ43prjbhqkPscoVve?filename=10.6.png]

Figure 10.6 Network matches the offer, accepting liquidity tokens from agent

[https://ipfs.io/ipfs/QmWKsyagMufsApPQDMVeCciwk4BP85B2iTiinpgr1CQx8E?filename=10.7.png]

Figure 10.7 Network gives credit to the agent who now holds a liquidity token liability and a commodity token asset

[https://ipfs.io/ipfs/QmVtgkvRLgfdh3qNqx2Gn8DFLwQEkKvPBRANAW43LvJUJq?filename=10.8.png]

Figure 10.8 Agent receives a (clearing) offer from the network to exchange liquidity tokens for a commodity token

[https://ipfs.io/ipfs/QmQkjcgcMo41y5jL6ZN7L5TdNyVC1MtiBdP7J7EAKfgQuH?filename=10.9.png]

Figure 10.9 Agent matches credit (clearing) offer

[https://ipfs.io/ipfs/QmVuhiHpQBMRrJNcowbYtbquhYaZLcuoRjP8q4YWebUbzb?filename=10.10.png]

Figure 10.10 Agent’s credit liabilities are cleared through netting, so the network now holds a net asset of 30 liquidity tokens

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COMMODITY TOKENS

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Economic agents initiate sales and purchases of goods and services. The tokens transacted in this process we call commodity tokens where the term ‘commodity’ means any good or service (tangible or intangible) produced for, and validated by, the network.[144]

[144] See footnote 71 for our clarification of the use of the term ‘commodity.’

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In effect, the commodity token is designed to represent informational events that include, but are not limited to, the delivery of actual goods and service. In a single commodity exchange, price is just one data event, with the potential statistical significance of other data events awaiting discovery within the network. In a dynamic system of exchange, commodity transactions will be tied to credit issuance. A commodity token, verifying the creation of commodity value, can be utilized to settle credit. Credit tokens and commodity tokens will therefore often be paired in clearing a ledger entry.

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Each agent will be an issuer of its own commodity tokens and each commodity token offer attaches to a specific commodity output. The acceptance of the offer of a commodity, declared by issuance of a token in payment, means that every commodity has a matching token. Accordingly, the total of commodity tokens issued in a time period is equal to the total commodity exchange for that period. This is true for each individual agent and for the network as a total. When we separate the data into new commodities and re-circulated commodities, commodity token issuance can be used as a one proxy measure of a ‘fundamental value’ in the network (see Appendix 12.2).

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Commodity tokens have the following attributes:

- Their quantity is determined by the offers/matches of individual agents.

- Their long-term price is determined by, and a measure of, the _real_ output of an economic agent.

- They are priced through market offers, where the bid is the commodity token, and the ask is denominated in the unit of exchange.

- The risks of commodity production are carried by the direct producer; default risk is carried by the token holder.

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Figures 10.11 to 10.13 depict commodity exchange.[145]

[https://ipfs.io/ipfs/QmT4ZUbrL7JFNkXCYoQoCVeZ3wqwmHNsCSbb6nyxwHEsrn?filename=10.11.png]

Figure 10.11 Agent publishes a commodity exchange offer

[https://ipfs.io/ipfs/QmZ2pjJ8PW1punAZpVGFHbh6tSndYt38q6wNHpLwxHHCJr?filename=10.12.png]

Figure 10.12 Network matches commodity exchange offer

[https://ipfs.io/ipfs/QmYRXeMmTQ5X8yhmiFgbqZk7oxoCmzgzeaEW8NSYgRi8wE?filename=10.13.png]

Figure 10.13 Agent now has commodity X and network has commodity Y assets

[145] Perry Mehrling’s lectures on the ‘Money view’ make use of these types of diagrams. See http://sites.bu.edu/perry/

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EXCHANGES BETWEEN TOKENS

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The Economic Space Protocol sees different tokens having different roles in the network. But there will also be exchange relations across token types and a selection warrants particular note, as shown in Figure 10.4, to illustrate the meanings of cross-token transactions.

Figure 10.14 Cross-token exchanges

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Two simple points, among many, can be drawn from Figure 10.4. First, commodity tokens can be used for the acquisition of stake or other commodities, or they can be used to clear credit. The latter is the closest to a commodity token being thought of as ‘money.’ The network validation of an output does not generate cash, but the clearing of credit. Second, exogenous money (fiat or cryptocoins) can enter and leave the network as commodities. This means that fiat can be used indirectly for the purchase of stake or commodities or the clearing of credit, and commodity outputs can be conveyed to fiat. The exchange rate will be determined by offers on the network, and this will regulate the incentives to move assets between fiat and the Economic Space Protocol unit of exchange.

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THREE TOKEN CATEGORIES TO SERVE THREE ECONOMIC FUNCTIONS

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Figures 10.2 to 10.13 show sequences of token exchanges across token categories (commodity for credit, for example) as well as within token categories (for example commodity for commodity). We see in these diagrams that each token type plays a different role in the flow of assets in the network. Each token type holds, encoded in its programming as a financial instrument (i.e. a smart contract), certain rights that are distinct. Each token type serves a different purpose. In summary:

- _Stake tokens are shares of an economic agent’s output._ They give the user the capacity to receive dividends through their application programming interface (API). It is an expression of accumulated ownership. Its ledger entry records a stock, and the attached exposure to the risks of growth and contraction in the value of that stock.[146] Furthermore, stake tokens serve as communication pipes, utilized for agents’ economic peering.

- _Liquidity tokens grant the right to clear_. This right can be verified through their AIP. If a clearance is successful, a liquidity token with any remainder is returned. It is an exposure to future potential states, but without carrying the risks of those states (except for default). It involves the advancement (and writing down) of credit to meet the immediate liquidity requirements of the network, both those between agents to maintain their accumulation and the matching and netting requirements of achieving settlement in exchange.

- _Commodity tokens are an exposure to an offer for an agreed output._ They are the most programmable token type, and can hold any interaction logic and carry any given rights. It comes into being only at the completion of a match, as verification of ‘what already is.’ This enables it to connect to measures of fundamental value as a ‘real abstraction.’

[146] Flows of stake in a secondary market occur via commodity tokens, where stake is now a ‘commodity’ to be exchanged.

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It is only with these three token types (and the reciprocal flows they stand for, that the Economic Space Protocol is able to articulate a self-reproducing economic system.

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DYNAMICS OF A TOKENIZED NETWORK

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THREE CIRCUITS OF VALUE

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The Economic Space Protocol is styled to give precision to the roles of different tokens, but there is a need to show how these token types, and the economic processes they express, relate together in the social process of ‘value in movement.’[147] In this chapter we explore the economy in the style of a circular flow. This style depicts the economy as a sequence of critical inter-connections, located in space time, that combine to secure the conditions for the reproduction of the flow. A circular flow should not depict the protocol as a closed system (there can be interaction with capitalist markets at any point). Nor should the flow be presumed automatic. Any break in the flow is a possible interruption to the system, but they should be presumed and incorporated.

[147] Marx (1885: ch.4), described capital as a social relation of value:

It is a movement, a circulatory process through different stages, which itself in turn includes three different forms of the circulatory process. Hence it can only be grasped as a movement, not as a static thing.

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Nonetheless, the definition of a sustainable network is that it has the capacity to generate its own conditions of reproduction. Put simply, if the network requires continuous injections of outside money in order to reproduce (after an initial bootstrapping phase as described in Appendix 1.2), it cannot have aspirations of being a protocol on which to build a postcapitalist economy. Yet that should not gainsay the expectation that outside money _will_ enter the network; but it will do so as a commodity, not as ‘money,’ and it will be to expand the network, not reproduce it.

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Framing an economy as a circular flow has a long history in economics, starting most prominently from François Quesnay’s _Tableau Économique_ (1758), through Marx’s circuits of capital in Volume II of _Capital_ (1885) (explicitly connected by Marx to Quesnay), Luxemburg’s _Accumulation of Capital_ (1913), Sraffa’s _Production of Commodities by Means of Commodities_ (1960), Leontiev’s input-output model (1966) and interpretations of Keynesian multiplier effects (sometimes said to have been derived from Marx). None of these depictions could be called a ‘formal model,’ at least not in the current sense in which that term is applied, but they are designed to be quantifiable (in a way that so much current discussion of the ‘circular economy’ is not). Our exposition here is conceived in that long tradition and offers a heuristic device to show patterns of inter-connectedness (and possible disconnection) in the economy.

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We take our mode of exposition from Marx’s (1885, Part I) depiction of circuits of capital. For Marx, these components of the circuit are money capital, commodity capital and industrial capital. All can be thought of as essential elements of a self-reproducing system, but they are also three ways of looking at an overall circular process that involves all of money, industry and commodities.[148]

[148] Marx saw these circuits as describing the path of individual companies and also the economy as a whole. The latter would be seen as a set of intersecting circuits where the output of one company is the input of another; the money revenue of one industrial process is shifted to fund another, etc.. These intersections are the focus of Leontiev’s input-output analysis. We will not extend our analysis in this way, but it is consistent with that project.

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In our depiction, the stages of the circular flow are: performance (Pe), collateral (Co) and credit (Cr). All circuits require each of these components. As a circuit, there is no original starting or end point, but when we describe the circuit by starting an explanation from each different point, and look at the way in which the circuit reproduces that nominated starting point, different issues of emphasis become prominent.

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So we define:

- _The Performance Circuit (Pe–Co–Cr–Pe)_. This circuit describes the requirements for a performance to be reproduced (which must include not just the act of performing, but also the validation of those performances by the network – a process we refer to, for shorthand, as ‘production and consumption’).

- _The Collateral Circuit (Co–Cr–Pe–Co)_. This circuit describes the requirements for collateral to be reproduced (which must include the reproduction of the stake portfolio that forms the basis of collateral).

- _The Credit Circuit (Cr–Pe–Co–Cr)_. This circuit describes the requirements for network credit to be reproduced (which must include the process of credit clearing from the previous ‘round’ of credit).

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Figure 11.1 shows a circuit in the new economic space. The outer ring is the ‘real’ economy of the flow between performances, collateral and credit. The inner circle shows the reciprocal token movements of commodity tokens, stake tokens and liquidity tokens. Consistent with our explanation of tokens and ledgers (Chapter 10), the ‘real’ processes flow in one direction (clockwise) and their reciprocal token issuance flows in the opposite direction (anticlockwise).

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Figure 11.1 Circuits in the New Economic Space

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THE PERFORMANCE CIRCUIT: THE CIRCUIT OF VALUE CREATION

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The start and end point of this circuit focuses on production and consumption as a pairing, for combined they depict the performance of value creation in the network.

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A performance starts with an offer by an agent to the network to produce outputs it believes will be valued by the network. The offer is also seeking staking from other agents who may directly participate or take some financial interest in realizing the performance. Through staking, performances become (underlying) assets which is the key to their standing as collateral (Pe–Co).

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The act of staking highlights that the offer of a performance is a risk position on the future: an estimation of whether the performance being staked will receive future social recognition (replication, adoption or some other form of socially recognized approval). This risk position is played out over time: whether a performance does, indeed, create the value its implementers intended and its stakers aspired to. The direct expression of the playing out of risk is the changing price of stake, as the network monitors the enactment of a performance.

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When stake is used as collateral for credit issuance (Co–Cr), a change in the value of a performance, and hence of stake, means that the value of collateral will change over time. In particular, there is a risk that a performance whose staked value falls will see a fall in the value of collateral, and hence shift the risks of default to the issuer of credit. There will be clear incentives for collateral to be based on a pooling of staked performances. This is the momentum of ‘risking together.’

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Hence, when credit is used to fund the acquisition of inputs for the agent’s next performance (be it repeating the same performance or innovating a new one) (Cr–Pe), it is apparent that the playing out of risks of the previous circuit impacts on the capacity of this agent to mobilize future credit. The signal of that risk evaluation is stake price. Stake framed as collateral now becomes the backing for the offer of a line of credit (Co–Cr), so the change in the value of a performance impacts the future provision of credit to fund the construction of future performances (Cr–Pe).

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When framed as the circuit of an individual performance, we see emphasis on risks and changing network valuation of performances. When framed as the circuit of the total of network performances, we see how the growth of network-created value leads to the funding of new performances. Hence we depict Pe–Pe as the circuit of value creation.[149]

[149] In the Marxian circuit, the return to the ‘starting point’ designates expanded value, acquired by the extraction of surplus value from labor. In our terms it would be a Pe–Pe circuit. But in the circuit of the new economic space, there is no process of surplus extraction from producers, so the circuit’s growth is via replication, not extraction.

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THE COLLATERAL CIRCUIT: THE CIRCUIT OF GROWTH

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The start and end point of this circuit focuses on the propensity of the network to expand wealth. Wealth in the network is expressed in stake price growth, for staking, and hence stake price, responds to where new value is being created. But our analysis of a circuit - a flow - should not be centered on the stock dimension. This is why we focus on stake-as-collateral rather than stake-as-wealth.

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Collateral is stake, qualified by risk, and measured by the unit of exchange. Stake exists as a (diversified) portfolio of unique, differentiated assets. When looked at as collateral, the focus shifts from the diversity of performance-backed stakes to the singularity of an abstracted unit of measure, expressed in the unit of exchange/unit of credit. Portfolio valuation is a critical analytical shift, for it opens up the calculative basis for decisions ‘rebalancing’ portfolio holdings as risks change. The intentional shift of agents’ stake holdings is the key to shifting the growth and direction of the network.[150]

[150] ‘Modern portfolio theory’ tells us that the value of the whole is not simply found in adding up component prices: the composite risk profile impacts valuation.

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In summary, collateral is the conversion of a diverse range of stakeholdings into a single index of valuation, and from here it can be expressed in the same terms as credit (Co–Cr): from the perspective of the portfolio it is the unit of exchange; from the perspective of credit, it is the unit of credit. But it is the same unit.

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Credit backed by collateral then appears as a trusted (risk-rated) source of liquidity, which will be advanced to individual agents to fund specific performances (Cr-Pe). In the previous link (Co-Cr), what was a process of converting diversity to sameness now becomes the opportunity for creating diversity out of sameness (Cr–Pe). This pulse from diversity to singularity to diversity drives the growth of the network. The question the circuit resolves is whether the performances that backed collateral at the ‘start’ of the circuit will be the same as the performances that get funded by the credit raised from the staking of those performances.

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In this role, collateral is the means to make risk commensurable across the network so that different performances and their risk/return calculations can be expressed in a common unit of measure. The movement from Pe–Co, which completes the circuit, has expressed a view about which performances will thrive and which will not.

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The Co–Co circuit expresses the risk-adjusted measure of _growth of accumulation_ by the network (compared with the Pe–Pe circuit which expresses the _growth of output value_ of the network).

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THE CREDIT CIRCUIT: THE CIRCUIT OF STABILITY

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The start and end point of this circuit focuses on the provision of liquidity and the propensity of the network to be stable (whilst it grows). Its starting point is individual offers of liquidity to enable the network’s new value creation (production and consumption). An agent draws on credit to fund the design, build and stake a future performance (Cr–Pe). The provision of credit avoids illiquidity which would otherwise impede the creation of (stakeable) performances. From the perspective of the credit circuit, the movement Cr–Pe expresses the decision about _which_ performances will be staked: which performances are most likely to succeed, and hence repay the credit from the value of their outputs.

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The movement Pe–Co reveals that the risks of the creditor and staker are different. The staker’s risk is reflected in their dividend deriving from the value of the performance. It is the _growth_ position. The creditor’s risk is simply that the performance generates enough return on stake to give the issuer of stake tokens sufficient revenue to repay credit. This is both a lower level of risk so credit will more likely be directed towards ‘safer’ investments: riskier investments will likely rely more on stake than on credit. This is the sense in which the credit circuit emphasizes the capacity of the system for stability.

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When the circuit is completed by collateral as the backing for credit (Co-Cr), it is now apparent that the more successful stakes are the ones that ‘survive’ to form future collateral, and especially collateral that will not decline in value over the life of the circuit. This selection process establishes a stable basis on which further performances can be chosen and funded.

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When framed as the circuit of an individual line of credit, the circuit shows the processes by which the conditions for its repayment are created (and the risks that are ’passed through the circuit). When framed as the circuit of total credit we see how credit is being directed to those performances most likely to meet risk/return calculus. The credit circuit, therefore signals not just the stability of the circuit, but the stability of the connection over time between performances and value.

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SIGNIFICANCE

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The circuits described above are a heuristic device: they are not inputs into a model or input/output analysis of the new economic space. The objective is to show that a single transaction, posed as a movement in a circuit, takes on different meaning according to how the circuit is being described. This is more than a statement that, to invoke Gunnar Myrdal, all points of view are views from a point (although that is important). It is that these different meanings form a spread of meaning, and therein lies fertile grounds for volatility in the system. But it is not a volatility to be eradicated as a threat; indeed it is the lifeblood of the network. Without volatility, the system would stagnate.

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STABILITY, VOLATILITY AND VALUE

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STABILITY

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In a distributed protocol, claims to stability cannot relate to conventional macroeconomic indicators like unemployment and GDP growth, nor to counter-cyclical policy measures. Those agendas are tasked to states: their taxing and expenditure policies and their monetary regulation capacities. Instead, claims to stability must be about the relationship between tokens and the material underliers of the network. To claim more – for example, to maintain stability with respect to the US dollar or to US economic growth – is not just a claim that, in practice, cannot be sustained (at least not without making this the sole purpose of a token); it is an aspiration we do not hold. A different economy, with a different set of goals and processes, is intended to diverge from the US economy; not to track its performance. This relates to our proposal that participants in the new economic space, who nonetheless remain heavily exposed to capitalist economies, will be ‘living in the spread’ (Chapter 1.6). The centrality of tokens in the Economic Space Protocol relates to token value stability and the capacity of tokens to facilitate economic processes in ways that tie token issuance to ‘real’ value and the capacity of credit issuance to the smooth operation of the network.

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We have the opportunity to rethink what we mean by stability. An economy may be stable in its own terms: its average return on capital, unemployment rate and exchange rate may be stable (we once could have included inflation rate and interest rates here; but no longer), but it may be unstable by other criteria such as poverty levels, life expectancy, access to health care, housing affordability or carbon emissions. When targeted metrics of a postcapitalist economy are different from those of a capitalist economy, each economy will likely appear as volatile, if not failing, when measured by the metrics of the other. We believe that the most robust claims of ‘stability’ cannot rest on attachment to another entity itself deemed ‘stable,’ without becoming a mere replica of that other entity. Stability must be a statement about self; not others. The claims to stability of the new economy are threefold:

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The unit of exchange/unit of credit stabilizes as the economy scales. This means the network is trusting the relationship between the credit and the network’s system of output valuation: in effect, new value created in the network is an accepted means to clear credit in the network.

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Stake prices change in an orderly way. This means that stake price reflects ‘fundamental value’ and the economy is producing the output it claims to produce.

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Volatility inside the network is a statement about the relationship between stake prices and the unit of exchange. This gives a measure of stability/volatility of ‘real’ network change over time and applies to both the volatility of individual stake prices and the total value of stake in the network.

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OUTSIDE CURRENCY WITHIN THE NETWORK

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A further issue of stability comes when we consider the impact of outside money within the network.[151] There is nothing stopping agents exchanging in dollars, just as they can use any object – a bag of barley or a coat – as a particular unit of exchange. But these will have to convert to other units for recognition across the network.

[151] Outside money (Gurley and Shaw, 1960) could be fiat currencies or other forms like bitcoin. For simplicity we will represent outside money as ’ dollars.’

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It has been mentioned (e.g. Chapter 10.5) that dollars can enter the network, but they do so as commodities, not as token substitutes. Entering as a commodity means that something must be ‘given up’ (offers of commodities or stake expressed in terms of the network unit of exchange) to acquire dollars. Nonetheless, a commodity entry of dollars does create an implicit exchange rate between the protocol unit of exchange and the dollar, for commodities and stake can be priced in either. Nonetheless, the entry of dollars and the creation of an exchange rate has significance. First, the exchange rate will impact where agents source commodities and how they fund stake, indicating that there are no clear boundaries to the network. This is the money/token dimension of living in the spread. Second, the exchange rate between the unit of exchange of the Economic Space Protocol and the dollar will likely be volatile. This doesn’t challenge the stability of the unit of exchange within the new economy’s token system; indeed, over time, the question will be whether it is the network’s unit of exchange or the dollar which is to be described as ‘volatile.’ In that optimistic statement lies the expression of the political battle for legitimacy of the new economic space.

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VOLATILITY

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With stability defined by reference to the value of outputs in the new economic space (see Appendix 12.2), there is no juxtaposition of stability and volatility. The goal is not to reduce volatility in the name of stability, but to recognize that volatility is integral to financial markets and to risk. The goal is to direct volatility and see that it occurs in parts of the system where there is ‘intentional’ indeterminacy; where it expresses flexibility, discovery and the estimation of risk and of value. Agents creating performances, purchasing stake, and changing their minds about which performances are value-creating, will generate welcome volatility as the pulse of the new economy. Each of these can be thought of as financial spreads, in which agents take positions.

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So volatility can be both essential to dynamism and itself convey valuable information. We know that in conventional capital markets, the development and trading of real-time volatility indices is seen as a critical market indicator. Inside a volatile market there are standard strategies for hedging to neutralize volatility (‘delta hedging’) and, moreover, to profit from trading volatility itself, stripped of directionality (Lee, 2020).

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We are not seeking to initiate the development of volatility-trading markets in the Economic Space Protocol (though nor do we hold a view as to the likelihood or merits of their development). The emergence of DeFi opens significant potential for these markets. Yet for all the potential of DeFi, it is currently just replicating the calculus of mainstream finance. While adding flexibility and capacity to agents, it also has potential of leveraging instability for its own sake.

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There are (as yet) no techniques for modeling current volatility in crypto markets. Any suggestion that DeFi can offer a cryptoeconomy financial tools to accurately measure (and hence delta hedge) volatility should be treated skeptically. Volatility is an expression not just of inefficiency of estimation but of social dynamics expressed in financial channels. Managing the channels does not itself stabilize social dynamics: it causes volatility to displace into other modes of expression. So for the Economic Space Protocol, there is no intention to control volatility with the goal of restricting it, but to direct it to sites where it can be embraced (as potential). Accordingly, volatility has two central roles.

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First, the information generated in markets has to be interrogated for patterns that can be given economic meanings as ‘performances’: offers of data analytics. Volatility here will be associated with the issuance of stake in those performances. But such performances carry risks, there can be no certainty about which performance designs will generate information which is valued by the network.[152] For any particular performance, this source of volatility can be expected to diminish as the performance becomes statistically consolidated; with new performances continually being configured, the domain of the issuance of stake itself remains an on-going site of volatility.

[152] In effect, the distinction between ‘noise’ and ‘real information’ (Black, 1986) cannot be known in advance.

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Secondly, the value of staked positions will change constantly as agents change their views about what performances are successful (valuable). This will be a domain of continual volatility, for volatility is the condition of liquidity in the market for stakes.

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It will be apparent that, in practice, the two volatilities will not be discrete: the first will embed expectations about the second, and the second will reflect levels of confidence in the first. The network has capacity to trace which economic events are associated with which stake price changes. This can be thought of as feedback loops on performance staking, vetting the values of past performance designs and giving incentives for agents to design more precise/granular performances.

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These stability-generating loops offer no guarantees of the network being long-run stable in its outcomes on the terms we have nominated. We should not overstate the capacity for creating stable outcomes. History shows that guarantees of stable systems only come with authoritarian control, and then only for as long as resistance can be suppressed.

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Currently, nation states, for all their regulatory and legal enforcement capacities, are struggling to secure even modest economic stability. For those states, policies for stabilization must be reconciled with a politics of whose interests have been served by the instability, whose interests must be protected in any stabilization process, and hence who is going to absorb the costs of stabilization policies. Moreover, this playing out of deep conflicts has to all be wrapped in a policy discourse of economic necessity and common interest, while in fact being neither of those.

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We are not engaging in this same process. Although we describe the network as a commitment to a collective future, especially through reciprocal staking and the mechanisms of distributed credit, there is no suggestion that this is the playing out of a single, agreed vision. Protocols are about processes, not realizing a pre-given agenda. Our goal is that in creating the conditions for a collective future, divided aspirations have transparent expression and network conflicts have mechanisms to be played out in an orderly way; not hidden behind the idea that a centralized authority knows and implements the common good.

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TOKENIZED VALUE: SIMPLE AND EXPANDED

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Marx drew the distinction between the simple form of value (the exchange of commodities) and the general form of value (growth, or the accumulation of capital). Keynes drew a roughly similar distinction between a ‘real exchange economy’ (monetized barter) and a ‘monetary economy’ (which includes time, credit, liquidity and therefore risk) (see Appendix 8.1). How do we describe tokens in the expanded accumulation of a ‘monetary economy’?

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Each performance is itself (in combination with other performances) eventually revealed in the creation of commodities.[153] It could be a ‘conventional’ commodity (good or service) but performances have been framed in the Economic Space Protocol to engage also data commodities, or what we have called economic media. This focus represents what is distinctive about commodities in the 21st century compared with the eras of both Marx and Keynes: the rise to prominence of intangible outputs whose value-as-commodity is so difficult to specify (see Appendix 5.1).

[153] Despite reference here to Marx, our use of the term ‘commodity,’ explained in footnote 71.

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In order to gain analytical access to data commodities, we have brought stake (and its projections of a contingent future of the performance) to the center of the analysis. The proposition is that the outputs of performances themselves may be difficult to define and measure, but that every proposed output should be measured by its intended outcomes, and that these can be expressed in measurable ways. But the stark, consequential expression of output evaluation is the preparedness to stake the process of their creation, and this can be clearly measured in a market process. Perhaps, it might be said, shifting from commodities being exchanged (Marx, Keynes) to performances being staked, and referring to this as the ‘simple’ form of value, is stretching the word ‘simple.’ But, we believe, this is necessary as a way of recognising the prominence of information in commodity-money relations.

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The expanded form of value in our analysis is qualitatively different from what we depict as the simple form, and the critical difference remains centered on the role of information. In this expanded version, information is not just the means by which individual agents make decisions about the future (what to stake). It is also the means by which the collective of agents (the network) reaches its determination of what constitutes value. For both Marx and Keynes, the rule of profit is central to delineating what parts of the economy grow via a cycle of profit and investment, and what parts shrink. For them, what constitutes ‘value’ is a resolved parameter, defined by the protocols that constitute capitalist accumulation. But in the new economic space, without a predetermined measure of ‘value,’ expansion becomes a more fluid process, for when agents stake performances, they not only project its creative success on a two dimensional scale (how profitable it will be) but now also on a third dimension (what will be judged socially to be valuable). In this framing, reading trends (information) is the universal key to explaining the dynamics of value.

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MV=PQ: AN APPLICATION TO THE ECONOMIC SPACE PROTOCOL TOKEN LOGIC

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The claim that the new economic space is grounded in fundamental value has been made on multiple occasions. It is perhaps a contentious one, predominantly because the concept itself is contentious.

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Many economists balk at the concept of ‘fundamental value.’ Some do so because they believe that current price in the market is a sufficient measure of ‘value’ and any idea that value is something ‘deeper’ than price, as the classical economists believe, is simply metaphysics. Hayek and the neo-classical economists are disposed to this view. Others, in the tradition of Keynes, (also) reject fundamental value specifically as it relates to asset prices. Asset prices, they say, incorporate guesses about the future expressed in the present and, as no-one can know the future, asset prices now are just expressions of popular opinion about the future (see Appendix 5.1).

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The Economic Space Protocol generates a direct connection between tokens and their material foundations in the ‘real’ economy. This foundation is what we mean by fundamental value: it implies a mode of valuing that looks to ‘deeper’ determinants (underliers) and discounts for speculation and short-term price movements. A clear connection between tokens and their underliers is itself a claim to a critical form of stability within the network.

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In cryptoeconomics, there emerged significant engagement with the concept of fundamental value, including via options pricing theory and the efficient markets hypothesis. We have made contributions to this debate in the past (e.g. Bryan 2018). Much analysis involves application of the old (originally 18th century; attributed to philosopher David Hume) ‘equation of exchange,’ often expressed as the ‘quantity theory of money.’ The Economic Space Protocol can give a version of a quantity theory as a way of verifying the direct connection of tokens to underliers at both the level of individual transactions and the level of the network overall.

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The formula of the old Quantity Theory of Money states: MV=PQ. Where:

M = the quantity of money in circulation,

V = its velocity of circulation of money,

P = the general price level in the economy and

Q = the quantity of goods and services sold in the economy.

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The cryptoeconomics discussion of this issue has been innovative and creative, albeit that interest in it appears to have fallen away in the past few years, despite the growing popularity of terms like ‘creator economy’ and ‘ownership economy’ which suggest the generation of measurable value.

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Taking MV=PQ into a crypto setting has required each of the variables be significantly adapted. Tokens are not simply 'M,' and hence V must change meaning (velocity of what?). In the Economic Space Protocol, ‘P’ is not a mono-measure of the terms of exchange and hence Q cannot be adequately expressed in relation to P.

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A token only comes into existence when an offer is matched (and expressed through the creation of a debit and a credit record on corresponding ledgers). As an aggregate, we can compile a list of offers. Thus an offer expresses the potential creation (supply) of a token. An exchange offer between a good or service(Q), and a token instrument(M), where Q units are in the bid and M units are in the ask, denotes the exchange ratio relationship between Q and M, that can be interpreted as the price (P) of a Q unit, in terms of M. V is the speed at which M is issued and cleared; an issue of liquidity considered Chapter 9.

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M represents the number of token units required to fulfill that exchange (Potential M). Since M is revolving, meaning it flows in both directions (as it is both ‘earned’ and ‘spent’) we can say that V is the average speed at which M flows in both directions in a given period of time. V then constitutes a multiplier where a net revolving amount of M, is required to fulfill all offers of Q at price P. Thus M x V = ∑(PM × Q) (per period of time used to calculate V).

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Where Q1P1 can be matched with Q2P2, netting represents an instant exchange, or it could be said that the M component can be netted away. The distributed market processes of offers and matching, closed by a netting process, gives a literal interpretation/verification of MV=PQ. Because every token offer (potential M) must be matched by a ‘commodity’ (PQ) in order to become ‘actual’ M, then M and PQ are ‘2 sides of the same token offer.’ And in this context, with every match the M that is specific to it expires. New M comes into being with a new offer validated by its matching. In effect, the velocity of a token is infinite, so M tends towards 0: that is, the settlement of an exchange is at once the expiry of M. There is money flow, but no money _supply_ required: M can be deemed to have been simultaneously issued and redeemed. So MV=PQ is definitionaly true, albeit not quite as an identity (as it is in the quantity theory of money), but as a protocol design.

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The above depiction, making a clear and direct connection of tokens to output, is contingent upon a direct offer matching and complete netting. The introduction of a time interval (credit) and the possibility that matching may be indirect, or mediated through a web of matchings, requires a deeper explanation.

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Netting is not itself an explanation of fundamental value when trades occur at different times and there is not a one-to-one correspondence between offers. Put simply, netting presupposes the existence of the things to be netted, yet their delivery to market will not be simultaneous with the offer. Temporal gaps open a need for credit to provide liquidity to the time interval. Hence fundamental value must be explained in the context of credit and the need to create liquidity across a time interval. In this context, credit itself has fundamental value: delivery on its promise of future exchangeability.

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THE CONDITIONS OF A DIGITAL POSTCAPITALIST ECONOMY

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INTRODUCTION

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The Economic Space Protocol proposes an economy of distributed relations, without reliance on a central 3rd party authority. This is not a proposition that current nation states are redundant, for there are many centralized facets of society, and the rule of law is a conspicuous one, which impact directly on the economy. The new economy will exist in any foreseeable future within a mainstream social and economic context. It is simply presenting an alternative economic way of being and doing, and it offers a protocol that can be readily adopted by anyone, without the sponsorship of any nation-state.

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How the new economy interfaces with the conventional economy is an open design space, but also a domain of uncertainty. The specific objective of our analysis is to present the case, and it can be no more than a case, that, after an initial bootstrapping phase, the Economic Space Protocol offers a set of economic relations that can be self-reproducing. There will be porous boundaries between the conventional economy and the new economy: fiat money, commodities and people will move between the two systems. Indeed it is likely that every single user will have a foot in each system. But it is critical that we can present an economic logic for a coherent alternative that can become independent of constant financial top-up from outside (for example in dollars). A design goal is that the new economy can produce a surplus that generates its own conditions of continuation and expansion.

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Self-sustainability in a narrow economic sense is important, but it would be a modest achievement if the alternative we are proposing looks pretty much the same as the existing system. The new economic space we are proposing offers a new vision of economic relations: the conditions of increasing equality of living standards, the creation of environmental health, and an economy sensitive to the aesthetic, cultural, and emotional attachments of participants. These are the collectively-determined, socially-defined conceptions of calculable value creation, or what we can term simply ‘network value.’

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NETWORK VALUE

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The contention throughout this analysis is the capacity of the new economic space to incorporate performances creating outputs motivated by network value, and the capacity of the network to reward the performances that animate network value creation. We need to make as clear as possible the connection between network value, rewards and system reproduction. It requires all elements of the Economic Space Protocol, and all the earlier chapters to be brought together.

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Performances motivated by network value are already familiar: philanthropy, crowdfunding, etc. are all expressions of this agenda. The challenge is to show the conditions under which network value is sustained and reproduced without the need for continual injections of outside money. In other words, the social surplus recognized in network value needs to be seen as equivalent to profit in capitalism: where the market evaluates and rewards performances with a yield of some form recognized by the network, either through individual agents or the commons.

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Outputs being ‘recognized by the network’ is the term we use rather than ‘selling for a profit,’ for many performances may not generate profit; indeed are not targeting that objective. But they are targeting _some_ objective: we are not compiling the conditions where just any old performance might expect reward.

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The ‘yield,’ if not profit, must be in a form acceptable to the network: it could be commodities, credit, stake or indeed any kind of governance or access rights. The condition of the network being capable of self-reproducing is that the yield takes a form that the network can use for its reproduction: the yield is, or can be converted to, the inputs required to open another circuit of accumulation. This capacity to form a circuit is critical to the difference from philanthropy, which requires on-going injections of outside money for a new circuit to commence.

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The question remains: how does the network systematically recognize the values that animate performances, such that those values are recognized and reproduced by the circuit of accumulation? Here, the issue of staking is pivotal. The market-based determination of which performances agents are willing to stake is the network’s way of declaring what sorts of outputs (and the notions of value they embed) the network is backing financially. If we assume that staking is undertaken for reward, as described above, it must be the case that the ways outputs get recognized by the network provide the conditions of reproduction of the circuit, including the remuneration of stake.

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However, this is not a sufficient framing to complete the argument, for it is posed only in terms of the conditions of reproduction of individual stakes and individual outputs and their outcomes; not the network as a whole. The additional dimension relevant here is that stake is the collateral for credit, and credit is paid down out of both commodity token exchanges and rewards for performances. With a focus on the conditions of issuance and repayment of credit, the analysis takes the general form, expressed now in the network’s unit of credit. The ultimate test of the network’s embrace of network value, and outputs produced in accordance with that value calculus, is whether a commodity token, received in return for the provision of a particular commodity output, will be accepted by (all agents in) the network for purposes of clearing credit. Its acceptance is network verification; its denial is the opposite.

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Acceptance will not be a sudden and arbitrary determination at the moment of offer, as the above depiction may seem to suggest. Information flows in the network, taking the form of performances (for data must be encoded with meaning), will be providing agents in the network with real-time information on how offers are being evaluated and matched. So, working backwards from the acceptance of a commodity token in paying down credit, we can identify the social logic that leads to its likelihood of acceptance: the commodity token must relate to a commodity deemed valuable, which must come from a performance deemed value-creating, which is funded by stake deemed by a critical number of staking agents to be an investment in value creation and deemed by the network as providing collateral worthy of credit issuance.

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This is the general process by which the Economic Space Protocol supports and sustains an economy of network value. In the new economy, everything depends on everything else, as it does in a capitalist economy or any economic system. The taxonomies and measures, the systems of valuation and rewards and the pulses that keep the system moving are all mutually defining. It cannot be otherwise. At the core of the Economic Space Protocol is a simple proposition: in a distributed economy, everything depends on the generation and processing of agent-generated information, and the way that information is compiled, evaluated and acted on must also be agent-centered. So the Economic Space Protocol is a case for agent-centered internal credibility and coherence, and the condition of entry is the desire to experiment.

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WHERE TO FROM HERE?

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The protocol design principles of the new economic space have required that we cover some detailed and diverse conceptual and philosophical issues and combine them with the capacities of programmable protocol design. There are, no doubt, other ways to imagine and initiate a transition to postcapitalism, and we welcome that debate.

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The proposal presented here makes the case that the conditions of postcapitalism lie latent within capitalism and, to make that latent potential imminent, we must develop ways to engage capitalism at its contemporary frontier of innovation; to go beyond, rather than to turn back. In particular, we need to engage three related elements.

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First is the emergence of a digital economy, which provides the technology to build that digital future, even though it is also integral to many of the incapacities of current capitalism to meet many social needs (notably well-paying ‘jobs’);

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Second is the risks that people are currently experiencing in their individual and collective lives: most obviously the risks of individual financial precarity on the one hand, and environmental destruction on the other. We are not trying to eliminate risk: we want to initiate social and economic relations where people can choose to risk in the creation of new things, to do so in creative, cooperative ways, and to have those creations valued socially. This will include, but is not restricted to, risking to innovate to address issues of inequality and environmental destruction.

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Third is the rise to economic and social dominance of a culture of financial calculation. Individually, this is expressed as the need for debt to acquire housing or gain education or, for too many, to undertake daily subsistence. This rise is integral to the current acceleration of a wide range of inequalities and poverties. Currently, this culture is expressed in the rise of banking and insurance as a site of both political power and economic crisis creation, but also a site of extraordinary innovation. We seek to take over that innovation.

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So we have adapted the capacities of post-blockchain technologies for protocol design to create ways for people in a network to risk together using financial techniques of staking, derivatives, liquidity, volatility, etc.. We are creating an economic media for postcapitalism.

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This innovation has required that we redesign elements of economic and social language and analysis. For some readers, this will have taken them through debates and specifications that felt excessively detailed, and perhaps even at points semantic, but we believe that language is important. The old categories always pull us back to old ways of posing and answering problems. Our project has seen us, over quite some time, imagining future economic possibilities and then having to configure the categories as well as the analysis that will bring them coherence. It has, we agree, made for a challenging read. Nonetheless, we are confident that, for all this analytical detail, when it comes to being part of the network and living in the performances it enables, the operational design can be quite simple.

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To get to that stage, where people are living at least aspects of their lives in a new economic space, more development work will be needed. This document has intentionally left unaddressed how the new economic space has a financial bridge to the capital markets, and a full exploration of the ‘outside spread’ that will likely drive capital market engagement with the new economic space. These developments await responses to the current document.

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These are complex, but solvable issues. They become solvable not because there is a decisive answer but because protocol design embeds indeterminacy, volatility and ambiguity. The question will be whether the Economic Space Protocol has embedded them in coherent ways that enable creative adaptation of agent practices and of the protocol itself. For now, we present the network as its own internal logic; as a way of depicting a viable, evolving, distributed postcapitalism, where participants design their own futures, both individually and collectively.

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So we now invite feedback, debate and expressions of interest from diverse sources, but especially from people and their organizations who can see in this proposal new ways of addressing social problems they have always known, or who now sense a potential for change they could not previously have imagined possible.

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