Transparency

Mechanisms to ensure effective symbolisation of value

A unit of any pure PoW cryptocurrency represents nothing in the world outside the blockchain except the application of processing power with the accompanying opportunity cost and environmental impact. This is often viewed as a feature but may also be the cause of the inherent instability evident in such currencies.

On the other hand, a cryptographic token of a communal benefit (such as a positive environment or social impact) makes reference to empirical phenomena. Such a token represents a claim to causality where an agent claims to be the cause of changes in real-world states. Such a claim will necessarily involve quantification of states and activities.

All quantification is expressed in a specific unit of measure according to some scale. The simplest scale just records the presence or absence of a single property. For any quantification to take place, observations of the empirical phenomena must be made and encoded as data. In all likelihood, aggregation and secondary transformations of this data will also take place in order to arrive at a final quantification in the relevant unit of measure.

For a measure to be a measure of impact, it must also include an estimate of what the situation would have been had the agent not undertaken the activity that lead to the changes in real-world states. Such a reference level is per definition counterfactual.

A cryptographic unit of value that represents an accomplished real-world outcome faces the challenge of ensuring the veracity and validity of the encoding of real-world outcomes into data on a distributed ledger. As such, it is related to the way in which the value of other cryptographic tokens are determined. The value of a utility token is a function of the community of users' assessment of the future willingness and ability of a service provider to exchange the token for a service combined with their assessment of their own and others' desire for the service in future[^4]. The value of an equity token is a function of the community of users' perception of the enduring value of the asset and the future enforceability of the rights represented by ownership of the token.

In the same way the value of a cryptographic token of an accomplished real-world outcome is a function of the community of users' estimation of the significance of such an outcome, their evaluation of the likelihood that such a token indeed uniquely represents the specific outcome in all material aspects, and the likelihood that a claim to be the cause of such an outcome will have value in future.

The mechanisms to be employed to secure, to the fullest extent possible, the value of a token of an accomplished real-world outcome must therefore focus on:

Articulating the unique significance of the outcome
Ensuring that the token uniquely represents the specific outcome in all material aspects
Providing a form of representation of the claim to have caused the outcome uniquely represented by the token that is, in principle, transferable
Establishing incentives for desired behaviour and disincentives for undesirable behaviour

This first aspect is effected though a clear set of standards that enables differentiation and comparison between outcomes. The second aspect will be accomplished if a transparent system of validation and verification is in place. The third aspect will be accomplished when mechanisms to ensure the integrity of the transaction history on the ledger itself exists. The fourth will be achieved if reputation has value but is difficult to obtain. The mechanisms needed to ensure clarity, veracity and tradability of representations of accomplished communal benefits are further elaborated in the paragraphs below.

Standards provide clarity

A token of an accomplished real-world outcome can have value if that outcome can be compared to, but also differentiated from, other outcomes. Standards allow for differentiation and comparison between outcomes because it provides clarity on what is meant by certain terms and what conditions need to be met before a certain claim can be made. Two outcomes that both comply to a standard can be compared in terms of the metrics relevant to that standard.

In order to provide the framework though which the unique significance of the outcome can be articulated, the standards used must provide a way to objectively and transparently describe the dimensions of an activity and provide a procedure for proving the causal link between an activity and an outcome. The dimensions of an activity comprises both what was done, who the agent of each action was and what the consequences of the activity was.

Standards give guidance on how to take something unique (an activity by an agent) and quantify its consequences as something generic. It is normally the consequences of an activity that is quantified.

Transparency, reproducibility and triangulation enhance veracity

In order to ensure that tokens uniquely represent specific outcomes in all material aspects, the process through which the token came into existence should be transparent and reproducible from the raw data right up to the issuance of the token. This means that data and meta-data should be stored and the methods of transformation should be unambiguous so that it may be repeated by another party to get the same result. Redundancy of data or parameters greatly adds to the confidence that third parties can have because it allows for triangulation.

The data collected should provide transparency on five aspects:

What really happened? (Activities)
Wouldn't it have happened anyway? (Baseline)
Who is really responsible? (Agency)
Are all the relevant outcomes included? (Completeness)
Is the representation unique? (Representation)

Tokenisation provides transferability

A token of the accomplishment of a real-world outcome will have value if it provides a form of representation of the claim to have caused the outcome that is uniquely represented by the token and that is transferable. This means in the first place that it must be possible to quantify the outcome in discrete units. It must then be possible to transfer each discrete unit between owners. Distributed ledger technology is supremely suited for this application.

Reputation provides incentives

The value of a token of an accomplished real-world outcome will be enhanced if the process though which such token is created and traded contains strong incentives for compliance and strong disincentives for anti-social behaviours. A similar mechanism is used to protect the value of traditional PoW cryptocurrencies where there are strong disincentives for launching a so-called 51 percent attack since the attack is likely to cost more than anything that can be gained from it. Proof-of-stake blockchains require users to stake a certain amount of currency for the privilege to perform certain transactions and may withhold the staked amount in cases where users flaunt the rules.

Originators of tokens of accomplished real-world outcomes have incentives for misrepresenting ownership, overestimation outcomes and collusion with verifiers. The key to protecting the value of tokens of accomplished real-world outcomes is to create a set of incentives where such behaviour is strongly disincentivised. Persistence of identity and persistence of data enable the functioning of incentives and disincentives. If data is persistent and public, fraud may be uncovered at any time after the fact.

Persistence of data can, however, only function as an incentive if identity is persistent and valuable. An open system aimed at mass participation cannot practically regulate the creation of new identities (i.e. new users). It is thus conceivable that a user may create numerous identities. Users will embrace a persistent identity if there are advantages to having a persistent identity such as when reputation can be gained over time and that reputation is the key to exerting influence and unlocking value. For reputation to function as incentive, reputation must be valuable and it must be expensive. The reputation needed to be an originator or a verifier should be valuable and expensive so that the loss of reputation associated with the eventual discovery of fraud will represent a real and substantial loss of value. Similarly, the reputation gained from long-standing compliance should unlock increasing value for its owner.

Reputation can therefore function as both incentive (i.e. it enables unlocking of value) and disincentive (i.e. its loss represent an expense) in the same way as staking functions in proof-of-stake blockchains.

Conclusion

It is therefore conceivable that a state of affairs can come to exist where unique cryptographic representations of verified communal benefits function as a symbol of value in a way similar to how paper money represented gold at the time of the gold standard. For this to be viable there must be standardisation, transparent data handling, unambiguous tokenisation as well as incentives and disincentives to drive compliance. Most importantly, such an initiative cannot hope to achieve critical mass if it is not fundamentally open and collaborative.