Presentation by Shermin Voshmgir & Krzysztof Paruch, Cryptoeconomics Research Lab, Vienna University of Economics How can we develop instruments and methods suitable for formalization of design, architecture, parameters and behavior of agents in a tokenized network, with focus on purpose-driven tokens that incentivize participants of an ecosystem to achieve cooperative behavior? We will explain how economics and mathematics have already developed various models and approaches to formalize economic motives and mannerisms of rational agents, which have been by national governments, regulators and institutions. We build on the assumption that crypto-economic systems and their rules, agents, nodes, token and governance structures resemble nation states consisting of laws, inhabitants, corporations, currencies and institutions. To what extent can these economic models be applied in crypto-economic applications? The aim ist therefore to model and design crypto-economies with the instruments and tools available in Macro- and Microeconomics. In order to achieve that we will describe the properties of x (one, two,...) current models in Economics and discuss possible and necessary adaptations to capture crypto-economic dynamics.

1. Token Economics
How can we apply existing economic theory
for Token Engineering?
Shermin Voshmgir, Director, Cryptoeconomics Research Lab, Vienna University of Economics
Kris Paruch, Token Engineering, Cryptoeconomics Research Lab, Vienna University of Economics

2. Our Team
30 Researchers
8 Departments

3. Tokens not new Thing
Money: Casino, Flight Miles, Loyalty Programs, Beeds, Masks,
Computing: Access right and computer operations

4. In Blockchain
Tokens are combination of value representation and/or access
rights.

5. TYPES OF TOKENS
- Technical Perspective
- Rights Perspective
- Fungibility Perspective
- Legal Perspective

6. Technical
Perspective
Protocol Tokens
& App Tokens
Protocol Tokens
Part of the incentive mechanism to make
a decentralized protocol work.
- Block validation incentives
(‘miner rewards’)
- Transaction spam prevention.
App Tokens
Easily issued on the application layer, few
lines of code, through smart contracts,
based on pre-defined standards like the
ERC-20 standard.
Can represent:
- physical good
- digital good
- right to perform an action in a
network or in the real world.

7. Rights
Perspective
What type of rights are
attached to the token?
Store of Value
(Passive Token)
Right to an underlying economic value
○ Security Tokens
○ Asset Backed Tokens
○ Currency Token
Access or Activity Rights
(Active token)
Token is required to participate in a network that
no centralized party controls.
○ Usage Tokens
Right perform to use network services.
○ Work tokens
Right to produce value within a network.
○ Reputation/Reward Tokens
Privileged right to do something within a
network.
Many tokens are not easily classifiable as they
have hybrid functions.

8. Fungibility
Perspective
What type of rights are
attached to the token?
Fungible Tokens
● Only quantity matters
Units of fungible assets of the same
kind are indistinguishable.
● Any amount can be merged or divided
into a larger or smaller amount of it
making it indistinguishable from the
rest.
Non-fungible Tokens
● Unique: can be distinguished from each
other
● Have varying properties.
● Everyone knows how many there are

9. Identical Unique
Transferable ● Poker Chips
● Discount Codes
● Cash
● Bus ticket
● Coupons
● Gift cards
● Bitcoin
(with limitations of blacklisted
adresses)
● Commodity
(rice, oil, gold)
● Utility Tokens
● Lottery ticket
● Ownership of car
● House key
● Title Deed
Non-
transferable
● Gym membership?
● Plane ticket?
● App with associated account?
● Drivers licence
● University Certificate
● Prescription
● Password
● Identity

10. NFTs
Each token is unique!
Use Cases of NFTs
● Crypto collectibles & Games
● Security Tokens & Property titles
○ Art
○ Collectibles
○ Memorabilia
○ Real Estate
● Certificates
● Identity
● Keys & Passes
● Fractional ownership of physical goods
● Managing Wills

11. Active
“Access or activity right”
Passive
“Store of Value”
Fixed Unlimited Fixed Unlimited
Transferable ● Memberships
● Utility tokens
(API keys)
● Tickets
● Appointments
● Securities
● Equity
● Currencies
● Commodities
Non-
transferrable
● Identity
● Airline Tickets
● Entry access
● Prescriptions
● Government
services
● Airlines miles
● Award points
● Records

12. Legal
Perspective
How will the token be
regulated?
International regulators are still trying to
understand and classify different token
types:
Currencies
Regulated by financial market authorities
Securities
no physical asset, just contracts, fall
under securities law:
● equity tokens
● convertible bonds
● debenture tokens
● option tokens
● smart contract futures
● bond token
● smart swap contracts
Utility Tokens ?

13. Power of Incentives!
Tokens can get people to do stuff!

15. 15

16. The Power of Incentives
Individual Value Creation
● Private actors extract value from society
● Individual profit maximization
● Externalization of costs where possible
● Internalizing private profit
Collective Value Creation
● Incentivize purpose of the network with network token
● Collective value creation instead of individual value creation

17. Purpose-driven Tokens
That steer a decentralized network without centralized parties
Proof of CO2 emission reduction
riding a bike, walking, public transportation instead of using a car. Solar
Coin, Electric Chain, Sun Exchange
Proof of energy consumption reduction
incentivizing users with a with token every time they prove that they have
used less energy.
Energi Mine, Electron
Proof of Tree Planted, Recycling, etc.
Proof of undertaking actions to help natural resources:
Plastic Bank, Earth Dollar, Bit Seeds, Eco Coin, Earth Token, Recycle To Coin

18. Token Engineering
@crypto3conomics

19. Our
Assumption
● Cryptoeconomic networks and their rules,
agents, nodes, token and governance
structures resemble nation states
consisting of laws, inhabitants,
corporations, currencies and institutions.
● Ethereum, Bitcoin & co have more in
common with Nation States and their
Economy than with companies and
corporate economics
● We already have tools to steer those
regional and international economies,
with micro and macroeconomic models
● We can take those & map the
stakeholders to participants in a token
driven network economy

21. Economics Research

22. Economic
Research
scientific field
since at least 250 years
● Different schools
scientific layers, and methods
● Different Perspectives
broad and global perspectives
(Macroeconomics) vs detailed and
specific relations (Microeconomics).
● Existing Mathematical Models
formalizations and respective
frameworks
● Models have been applied
We have data and experience to draw on

25. Economics
is a Bitch
● Many different schools!
● Evolving from each other
● Interrelated with each other
● Which might contradict each other
● Some are popular, others not
● Some are implemented, others not
● Whenever unexpected or indescribable
situations occur, new thinking is
suggested and invalid models are
adapted
● Everyone is a specialist in their own
field.

26. Approach
& Goal
● Theoretical Research
Backwards-looking, focusing on related
scientific fields to identify existing
models, approaches and solutions.
● Practical implementation
Forward-looking and hands on with a
series of interactive events (talks,
workshops, hackathons) to collect
current solutions and knowledge of the
cryptocommunity
Combine findings from both working groups
to develop a token engineering framework in
an iterative manner

27. Our
Methods
● Identify similarities
of Cryptoeconomics with Economics
● Formalize network-design and
network-evaluation models based on
existing economic and mathematical models
● Identify token functionality potential
from a monetary perspective
● Develop a taxonomy for this new scientific
field.
● Design a bottom up Token Engineering
framework to enable future state of the art
design of ecosystems
● Summarize all ecosystem-design
recommendations into scientific papers and
conclude all findings.

28. Household optimization

29. Scientific
Questions
● How to formalize properties and
functionalities of a network token in
order to understand its behaviour?
● Which general structure captures the
dynamics of an agent-based ecosystem
best?
● How to model the interactions between
actors?
● How to model actors’ behaviour within
an ecosystem?
● Which types of actors participate in a
network?
● Living Doc of Research Questions.
Contribute Living Doc:

30. Living in a
perfect
world?
Institutional economics
● The economy is not an ideal world!
● There are imperfections, irrationalities
and information differences
● Institutional economy focuses on
transactions, their costs and how
institutional coordination can reduce
those
● Static vs dynamic perspective
(conditions are subject to change)
● Efficiency vs vested-interest perspective
● Firms & governments can apply rules to
improve their respective performance

31. Focus on
Individuals
Microeconomics
● Study of particular markets &
segments of economy
○ consumer behaviour
○ individual labour markets
○ theory of firms
● Demand, supply & equilibrium
● Measurement of elasticities
● Market structure - competition?
● Opportunity costs
● Game Theory
● Externalities arising from production
and consumption

32. Focus on
Aggregates
Macroeconomics
● Study of the whole economy. It looks
at ‘aggregate’ variables such as:
○ aggregate demand
○ national output
○ inflation
● Monetary & Fiscal policy
● Inflation & unemployment
● Economic growth
● International trade & globalisation
● Differences in living standards and
economic growth between countries
● Government borrowing

33. Evolution of Macroeconomics
● Classical economic approaches with supply and demand
● After Great Depression: difficulty to explain how goods could go unsold and workers could be left
unemployed.
● Introduction of liquidity preferences in tough economic times (by people and businesses)
● Introduction of money demand
● Introduction of rational expectations.
● RBC (real business cycles) were introduced to explain recessions and unemployment with
changes in technology instead of changes in the markets for goods or money.
● Focusing on developing micro-founded models
● By the late 1990s economists had reached a rough consensus: combination of nominal rigidity and
rational expectations and the RBC methodology to produce dynamic stochastic general
equilibrium (DSGE) models.

34. A first guess of a model

35. DSGE
Model
Dynamic Stochastic
General Equilibrium
● Used by many Central Banks
Agent-based models of economies that
play an important role in the formulation
and communication of monetary policy
● Result of Lucas-critique (1976): models
should specify dynamic, optimal decision
rules of rational individuals, or
microfoundations
● Different Implementations:
Rotemberg & Woodford introduced an
econometric framework in 1997 that
paved the way for the ECB (in 2002) to
develope a DSGE (Smets-Wouters) model
which it uses to analyze the economy of
the Eurozone as a whole

36. DSGE
for
Token Design
Describe & discuss
most important characteristics:
● Representative Actors
● Microfounded
● Maximizing lifetime-utility
● Intertemporal substitution / tradeoffs
● Decisions based on future expectations
Describe & discuss
most important actors:
● Households
● Firms
● Government
Identify similarities to
distributed networks
steered by cryptographic tokens

37. DSGE
Model
Assumptions →
Detailed description here
Economy consists of 3 Blocks
● Demand Side
● Supply Side
● Monetary Policy
Populated by 4 classes of actors
A. Representative household
B. Continuum of intermediate firms
C. Repr. final-good-producing firm
D. Monetary authority
Goals of actors
A. Maximize lifetime utility
B. Maximize lifetime profit
C. Maximize lifetime profit
D. Steer economy with respect to:
○ GDP Growth
○ Inflation
○ short -term interest rate

38. DSGE Structure

39. Actors and Structure of Economy
Economy:
A: A representative household
B: MANY intermediate firms
C: A representative
final-good-producing firm
D: Monetary Authority
A
B
B
B
Bi
C
D
work
Y(i)P(i)
w(i)
P Y
Interest rate

40. Household optimization

41. What do we hope to achieve
Modeling
● We definitely can understand cryptoeconomies better if we establish connections to
existing models
● Best Case: We find a model fully applicable to crypto - world
● More realistic: We can use existing models, but have to include adaptations
Engineering
● We can model cryptoeconomies in the style of nation states
● We can utilize the same techniques
● We might be able to apply similar formulas capturing the same mechanics
● We can see what will not work
● If same equations apply, we are equipped with ready solutions as well

42. DSGE
Model
Similarities to Crypto?
What can we use?
How can we adapt?
1. We have different actors as well
2. All have specific goals they are trying to
achieve
3. In order to do so, they must interact
4. All small interactions influence global
system
5. Actors are incentivised / guided by a
currency of the economy
6. Monetary policy plays a role
7. Communication of monetary policy play a
role
8. Expectations about the future play a role
9. Do actors have to evaluate and trade off
options / strategies?

43. On which levels do we seek similarities?
Architecture
layer
Modeling &
Mechanics
layer
Equations
layer
Solution
layer
Policy
layer

44. How could this apply to crypto?
What is the
general
structure of
the
network?
Who plays a role?
Which interactions
take place? How are
values transferred?
Can we
formalize the
interactions
using known
formulas?
Do we already
know how to
solve those
problems?
Do we know
best responses
and their
consequences
?

45. DSGE
Model
Workshop
Outline
● Analyze actors’ optimization problems
● Analyze the formulas and its elements
● Discuss the mechanics required to capture
all dynamics of the model
● Look at microeconomic fundamentals of
actors’ behavior
● Search for and map similarities of DSGE to
protocol design / token engineering
approach
● Define practical step-by-step approaches

46. Workshop

47. Household
optimization
problem
- Discuss components
- Discuss properties
- Identify key elements &
mechanics

48. Stakeholder Analysis
1. Who are the respective agents?
2. What are their roles?
3. What are their action options?
4. What is their setting / distribution in the economy?
5. How do they evolve over time?

49. Utility & Disutility

50. Preferences of Individuals

51. Discount Rate / Discount Factor

52. Choosing paths + Intertemporal trade offs

53. Homogeneity - Representative household

54. Management of expectations & transparency of
monetary policy communication

55. Limitations and possible extensions

56. On which level can we apply the models?

57. Sources & Further readings
https://www.newyorkfed.org/medialibrary/media/research/epr/10v16n2/1010sbor.pdf

58. Appendix

59. Micro vs Macro
Micro
Study of particular markets & segments of
economy: consumer behaviour, individual
labour markets, and the theory of firms.
● Supply and demand in individual
markets
● Individual consumer behaviour.
● Individual labour markets
● Externalities arising from production
and consumption.
Macroeconomics
Study of the whole economy. It looks at
‘aggregate’ variables, such as aggregate
demand, national output and inflation
● Monetary / Fiscal policy.
● Inflation & unemployment.
● Economic growth
● International trade & globalisation
● Differences in living standards and
economic growth between countries.
● Government borrowing

60. Token Engineering
● New type of Value Creation
● We lack Best Practices (only PoW)
● We lack Modeling & Forecasting tools
● Legal uncertainties