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Welcome everyone. This is uh Wharton
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Finance the future of finance podcast.
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This is our second season and in the
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second season we are talking about
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digital assets, cryptocurrencies,
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tokens, uh decentralized finance and
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everything related to that space. I am
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Mitai Goldstein. I am professor of
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finance here at Wharton and I'm
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currently the chair of the finance
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department and I'm hosting this uh
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podcast and today we're going to devote
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the episode to thinking about the
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economics of tokens, the economics of
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tokenization. Uh this is a term that is
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now known as tokconomics. We're going to
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try to understand what are the
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fundamental forces that are driving the
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market for tokens and coins and how
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these forces are different from some of
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the other markets financial assets that
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we are used to and that we have been
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thinking about in the past. I have the
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perfect guest today to think about those
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issues and this is uh Shimon Kogan.
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Shimon Kogan has been with us at Walton
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for the last 10 years or so where he has
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been uh teaching uh the fintech course.
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Uh he was one of the first movers into
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the area of uh fintech when few places
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had fintech courses. Uh he already
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designed one and came to teach it for us
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and has been doing it uh since then uh
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with great success. He also worked on uh
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related issues in his own uh research
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and we're going to talk about that as
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well. Uh welcome uh Shimon. It's great
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to have you.
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>> Thank you. It's a pleasure being
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invited. I I'm I'm a I'm a fan of the
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podcast. Was listening to the to the
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first episode. So uh looking forward to
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the conversation.
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>> So let's uh dive uh right in and try to
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understand uh some of the terms that we
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are talking about. Uh c can you take a
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step back and maybe help us understand
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help the audience understand what do we
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think about when we think about uh
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tokens and uh coins? What are the common
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uses uh for them? Uh how are they
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potentially going to change the
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financial system? And you know a lot of
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it is maybe just a pipe dream things
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that we are aspiring to but have not
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been realized yet. So the question is
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how much is real and how much is still
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just a fantasy. May maybe it's too much
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for the first question but uh you you
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can start wherever you want.
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>> I'll try to deliver on that at least at
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a sort of at a high level because I'm
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sure that we're going to dive into some
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of the more specifics um during the
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conversation but but it's it's a it's a
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it's a good place to start kind of at
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the top because there are there lots of
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terms in this field and it gets uh it
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gets quite confusing.
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So let's start at the top. So in in kind
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of the world of crypto I think it's
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important to distinguish between
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different class of assets because it
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tells you something about the underlying
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technology and the underlying uh
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structure right so kind of at the core
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level we have cryptocurrencies right in
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each of these cryptocurrencies is
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associated with a particular blockchain
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so you know blood is of course familiar
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with BTC right that's not to be confused
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with Bitcoin right so Bitcoin is the
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blockchain protocol BTC is the native
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currency for that. Here as well, I think
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it's helpful to distinguish between
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transactional only blockchains like
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Bitcoin or Litecoin where the primary
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use case of the coin aside for paying
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for basically the security. So, it kind
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of actually came out of of of true and
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um um legitimate kind of need. But the
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primary use case in these kind of
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blockchains is kind of payments, right?
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um and um and want to separate that from
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kind of the the second generation if you
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will of blockchains and those are
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programmable
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blockchains like Ethereum, Salana and
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there there are many other competitors
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where the primary use case of the native
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digital um coin is actually to pay for
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the execution of smart contracts. Okay,
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so we have cryptocurrencies as sort of
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the main type of asset. Now notice and
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that's important too that when we talk
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about cryptocurrencies lots of
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cryptocurrencies because each of them is
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sort of native to its own blockchain you
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cannot take you cannot take Bitcoin and
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transact in Ethereum and vice versa
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without some third party offering kind
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of like bridge services and we can talk
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about that if if if you're interested.
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Now on programmable blockchains lots of
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things that you can do but as it turns
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out um you can create tokens right so we
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want to distinguish between again the
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cryptocurrency like Ethereum and tokens
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build or that live on Ethereum and so
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those are assets that are created by
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applications
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around various use cases some of them
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could be payments for services could be
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voting could be control we can we'll
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come back to it when we talk about
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tokconomics right So in fact the fact
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that uh this is sort of touring complete
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um programming language means that you
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can create lots and lots of different
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varieties of contracts and we see that
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uh in practice that also introduces
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vulnerability. So what um say Ethereum
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I'm going to many of my examples are
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going to be from Ethereum because it's
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simply the largest uh programmable
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blockchain. they kind of created
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templates of uh types of tokens just to
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make developers life easier, right? So
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you don't have to sort of figure out
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from scratch all the features uh and
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open yourself up to um security
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vulnerabilities. So they designed kind
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of templates of tokens. So um you may be
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familiar with ERC20 which is kind of the
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the the funible token uh standard that
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was behind the ICO boom or heavily used
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during the ICO boom. we have ERC 721
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tokens. So that's kind of the template
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often times used for nonf fungeible
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tokens. More recently we have ERC400
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which is now advanced as a as a kind of
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format to offer tokenization of offchain
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assets. Okay. So again we have token we
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have we have cryptocurrencies
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we have tokens. Now those tokens
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inherent the security of the blockchain
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on which they were developed. So as a
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developer, you have to ask yourself um
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where you want to develop your
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application and where these tokens are
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going to live because again they don't
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port from one protocol to another. And
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so naturally there's a lot of
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competition around kind of eyeballs and
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attention of developers um by these what
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we call layer ones by these programmable
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blockchains.
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>> But if you want to think about the main
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economic uh uses for them, how would you
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classify that? The first is and that's a
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very specific type of token but it it's
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so specific that it has its own name and
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those are stable coins right so stable
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coins are tokens
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um that are designed to sort of keep a
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peg to typically US dollar but could be
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in principle anything it's a big
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business you know circle went public
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went from like 30 to 200 bucks overnight
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um so that's it's a real big business
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there's another uh big business around
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and some some real traction around
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tokconization. Okay. because that's the
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idea of representing
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um non kind of non-cryptonative assets
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um um on on crypto
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infra or blockchain infrastructure right
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so black rockck uh for example partnered
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with securize to offer its money market
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fund biddu
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so basically what you're saying is
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taking financial assets and putting them
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on token
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and and then what what is what is the
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what is The advantage of of doing that
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>> there could be few advantages right now
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the use case that we are seeing first of
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all what you get is instantaneous
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settlement right um so even if you're
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institutional player once you have
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stable coins and you have um these these
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crypton native
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securities right uh or or representation
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of them then you have 247 instantaneous
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settlement which we still don't have
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even if you're even if you're a large um
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sort of corporation say right I mean you
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still if you're moving money about
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settlement takes time depending on on
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what kind of asset um you're looking at
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but there's there's obviously sort of
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the ambition is is much bigger than that
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Robin Hood announced I think I think
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last week uh that they're going to offer
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tokens associated with private equity
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right so they're going to take I don't
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SpaceX and OpenAI etc. and represent
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them as tokens and people are talking
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about what's called real world
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tokenizing real world assets. So those
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are not securities at all. This could be
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anything from your um you know I don't
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know collectibles to
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real estate.
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>> So it allows us to trade on things that
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otherwise we would not be able to trade
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and things that we could trade it allows
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us to do it more efficiently.
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>> That's right. and and for example I mean
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and and you know look look this is not a
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pan of I mean and and I have a lot
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of conversations with people in the
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industry about this I mean I think that
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it you know there are parts of it that
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make sense there are parts of it that I
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still are kind of people are
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um I'm not thinking carefully through
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like for example there are fundamental
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reasons why some of these assets are
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illquid right that ili liquidity I don't
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think is going to go away by creating a
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digital representation and offering ing
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people to trade it 24/7. That that's
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that's not a solution to the fundamental
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problem that causes these assets to be
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uh non-tradable. But and you know, I'll
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take the other side of this, but you can
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take assets that have a fairly
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infrequent kind of price discovery
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and you know, you're still not going to
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solve the problem of of of that price
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being being um stale, but you can you
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can now and and again, this is not
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fiction. this is this is happening. You
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can allow owners of these assets to
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pledge them as collateral and that that
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could be kind of a partial solution for
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for the liquidity problem. Right.
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>> Right. Yes.
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>> So, so I I have an asset that you have a
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hard time valuing. Right. And you're
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saying, look, I don't know if it's worth
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80 or 90 or 100, but you know, it's
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presumably worth, you know, you know,
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the probability that it's worth less
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than 20 is very low. So I'll lend you
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I'll if you if you if you basically lock
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this asset in a smart contract I'll lend
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you
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20 bucks against this right with with
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appropriate uh interest. So again you
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know I think I think it's sort of an
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interesting solution of kind of indirect
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way of giving some liquidity and by
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making these assets at the very least
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pledgeible
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>> right so when we are thinking about
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tokconomics the economics of tokens we
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would like to understand the supply the
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demand how prices are formed if we are
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thinking about other financial assets
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like stocks I think we have uh very
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wellestablished frameworks uh you're
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thinking about uh future earning
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earnings, future cash flows, you're
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discounting them and so on. Uh those uh
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rules are not working exactly like that
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when it comes to tokens and and this is
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what makes the economics a little richer
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and and more interesting. So what what
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do you think are the other forces and
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how should we think about uh the the
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economics here?
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>> No, it's a it's a great question. Um
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yeah, first of all, let me say that, you
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know, it should be obvious from from
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from our discussion so far that this
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flexibility uh allows us to create uh
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all sorts of tokens with lots of
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different features, right? Uh and so I
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think one of the challenges of of this
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industry is that at least from what I
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see there's mostly there's very little
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theory. uh there's actually not that
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much even empirical work from academia
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sort of to guide say new platform
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builders for how do they structure so
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they they often come and ask these
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questions like well you know how should
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I control supply you know what is the
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emission rate um burn rate um how should
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etc so lots of different so basically
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the dimensions along which they have
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choices are are are are quite broad
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right um and so first of all I want to
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point out that that there's I think that
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there's more that we don't understand
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about sort of optimal kind of contract
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design if you will in the context of
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economics um and um than we do that
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that's at least my my personal opinion
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on this now um I think it's helpful to
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sort of draw
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parallels to equities right um so there
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are some similarities and some
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differences right so the the obvious
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difference so They kind of look a little
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bit like uh like each other because both
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under some circumstances give you some
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control rights and ownership rights and
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and some of them kind of although they
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don't declare that give you some cash
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flow rights. Um but but but let's
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understand where kind of what world each
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of these live in right. So in the world
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of securities right or equities um
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essentially what you have is sort of a
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legal structure
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that um that safeguards the holders of
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securities against
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um expose bad behavior uh by by managers
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or or controllers, right? Um so
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obviously you do not have that legal
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protection when it comes to tokens,
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right? um at least not under I think on
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under the current uh legal framework.
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What you do have with tokens is the
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ability to sort of what we call
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pre-commit, right? So what what you can
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what you can do for example with tokens
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that you cannot do uh with uh with
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equities is to say you know I'm going to
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I'm going to program in the rate by
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which new tokens are going to be issued
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and it's going to be a function of these
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conditions like in take bitcoin for
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example right it's purely a condition
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like it's a function of time right
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there's no the price of bitcoin doesn't
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affect the emission of of Bitcoin, you
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know, how many miners there are, it's
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like all all these um they don't matter.
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So that's a particular choice that you
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can do in in in in kind of crypto world
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that you cannot uh easily implement with
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equities.
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>> This kind of leads me to something
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related that uh people would think maybe
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is on the fringe but is getting a lot of
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attention which is uh meme coins. Um and
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you have coins that are kind of based on
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nothing. Uh if you think about uh
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dodgecoin or uh uh shea you know others
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uh you you you b you you basically have
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uh a token that has value just because
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other people think it has value and not
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because it represents anything that is
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underlying it that would be uh uh
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valuable. So would you think about that
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also uh using the same framework or do
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you think this is something completely
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different?
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>> So I think I think um that's a good
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question. Well I mean you know if you
00:16:01
want to be provocative you can ask
00:16:02
whether Bitcoin is a memecoin as well.
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>> Do you think that Bitcoin is a is a
00:16:07
memecoin?
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>> No. But but what I'm saying is that I I
00:16:10
I personally don't
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>> but but
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>> no because at least with Bitcoin in the
00:16:14
beginning there was this idea that it's
00:16:17
going to be kind of a new currency.
00:16:19
people are going to use it to buy things
00:16:20
and so on. Um I don't think it really
00:16:23
panned out this way so far, but there
00:16:26
was some uh use case.
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>> Absolutely. I I I I'm not suggesting
00:16:31
that Bitcoin is a memecoin. All I'm
00:16:33
saying is that if you sort of step
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officially like if you if you kind of
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take a few steps back and kind of look
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for from a kind of high kind of high
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level perspective, you can ask yourself,
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well, what is the what is what is sort
00:16:44
of the tangible utility? You're
00:16:46
absolutely right. By the way, you know,
00:16:48
with with some of the meme coins, the
00:16:50
process kind of it was kind of a faking
00:16:53
until you make it in some sense. I don't
00:16:54
think it was designed, right? But, you
00:16:56
know, Dodgecoin now is Alan Musk is
00:16:59
suggesting that it's going to be the
00:17:01
payment rail maybe for for X, you know,
00:17:04
and you have you have now kind of a mini
00:17:08
ecosystem around Shibaino. Again, I
00:17:11
don't think it was there in the first
00:17:14
place. I do want to mention and and I
00:17:17
and I do think that um there there are
00:17:20
there's a lot of other factors that are
00:17:24
at play here uh that are more coming
00:17:27
from behavioral finance than anything
00:17:29
else in terms of kind of thinking about
00:17:32
uh valuation.
00:17:34
But I I do want to mention something
00:17:36
that that we found that that I think is
00:17:38
relevant for this uh discussion in a
00:17:41
paper where we um we had access to a
00:17:44
really interesting data set uh from it
00:17:47
Toro. So Tor is publicly traded
00:17:49
companies is basically retail broker
00:17:51
that has um operations in over 100
00:17:55
markets. And one of the neat features of
00:17:58
it is that kind of from from the from
00:18:00
the get-go um and they offered um retail
00:18:05
investors the ability to uh invest in
00:18:08
lots of different types of assets. So
00:18:09
they were one of the first to actually
00:18:12
embrace crypto. Um and the question that
00:18:14
we asked was really simple. is like do
00:18:16
people you know so take the same
00:18:18
individual
00:18:20
um do they seem to behave different in
00:18:23
cryptos than in in say equities or gold?
00:18:26
So we wanted to ask that very simple
00:18:28
question and more specifically what we
00:18:30
we're interested in is how expectations
00:18:34
of future returns of these asset classes
00:18:37
actually respond to prices which is kind
00:18:39
of what what you're getting at right um
00:18:43
and so um you know under some
00:18:47
assumptions what you can do is you can
00:18:48
back out um the share in your in the
00:18:52
portfolio for users um dedicated to each
00:18:55
of these asset classes and you just
00:18:57
basically s you can estimate how these
00:19:00
um portfolio shares how they respond to
00:19:04
past returns. Essentially what we find
00:19:07
is that a very robust finding right lots
00:19:10
of different specifications. We find
00:19:13
that when you look at equities um people
00:19:17
have retail investors at least in our
00:19:19
sample have contrarian beliefs right so
00:19:23
equity uh prices go up people believe
00:19:26
that future returns are going to be
00:19:28
lower than they were before right and by
00:19:30
the way that's true for gold as well but
00:19:32
not for crypto okay so they they appear
00:19:36
to have kind of momentum like beliefs um
00:19:39
in crypto and we try to understand where
00:19:43
is coming from. Um and and so for
00:19:46
example, we looked at kind of lottery
00:19:49
like stocks to see whether people behave
00:19:52
in kind of whether people have sort of
00:19:54
momentum beliefs in when when you when
00:19:57
you focus on lottery like uh stocks. So
00:20:01
those are stocks that have positive
00:20:03
skewess you know maybe young stocks
00:20:06
smaller ones lower like there there
00:20:08
various known proxies for this and
00:20:10
interestingly we don't find that like we
00:20:12
don't find we still find contrarian
00:20:14
beliefs even in these lottery like uh
00:20:17
stocks so there's sort of something
00:20:19
specific about crypto
00:20:21
>> yeah and this is the role of adoption
00:20:23
and coordination I think this speaks
00:20:26
very clearly to that and and you say
00:20:29
this can also support uh meme coins that
00:20:32
might not have any underlying value, but
00:20:34
the value is just coming from the fact
00:20:36
that others are are using it.
00:20:40
>> That's true. Although I think that with
00:20:42
memecoins it's it's you know it's it's
00:20:45
kind of like a a very extreme case
00:20:47
because um because there's basically no
00:20:50
at least as you pointed out like there's
00:20:52
no even a pretense by the way I think
00:20:54
it's for regulatory reasons right so
00:20:56
part of it started joke part of I think
00:20:59
started as as a as a way of avoiding
00:21:02
being classified as security there's no
00:21:04
pretense of anything being underpinning
00:21:08
its value right so very kind of extreme
00:21:11
a case of not where we push fundamentals
00:21:14
to to the future where we have no
00:21:17
fundamentals at all. And um
00:21:20
>> and you know and and I think it's
00:21:21
interesting and and you know there
00:21:23
there's there's some really interesting
00:21:25
studies done in the 70s and 80s looking
00:21:28
at experimental markets where they try
00:21:31
to do this like they try to basically
00:21:34
see what happens when you push
00:21:36
fundamentals further out into the
00:21:37
future. And then they found two things
00:21:39
that could be actually relevant for this
00:21:41
these markets, right? They found that
00:21:44
actually first of all you can you can
00:21:45
create these bubbles in a lab like in a
00:21:47
very controlled very simple environment
00:21:49
in a repeatable way. But they found two
00:21:54
two things. They first of all they found
00:21:56
that expectations are adaptive right. So
00:21:59
when these bubbles happen and you ask
00:22:02
traders what they think the price is
00:22:04
going to happen like they they they many
00:22:05
of them understand that prices get
00:22:07
detached from fundamentals but these
00:22:09
fundamentals are not going to be not
00:22:11
going to kind of show up until later in
00:22:13
the future and so they exhibit these
00:22:16
adaptive expectations. The second thing
00:22:18
is that they underestimate
00:22:20
how quickly the bubble will burst on
00:22:22
average, right? Um because it's sort of
00:22:26
it's it's clear that you know because of
00:22:28
the fundamental at some point there's
00:22:30
something anchoring prices.
00:22:32
>> There is some parallel also to mean meme
00:22:35
stocks, right? So we talked in the
00:22:38
previous uh season uh I talked to Matt
00:22:40
Lavine about uh meme stocks and social
00:22:43
behavior in the financial market and uh
00:22:46
clearly that is a very strong force here
00:22:49
as as well maybe even more extreme
00:22:51
because with meme stocks there is a
00:22:54
grain of fundamental whereas here there
00:22:56
isn't. So these are uh may maybe the the
00:23:00
same the same underlying forces but uh
00:23:03
even more extreme that we see them here
00:23:04
in in tokconomics.
00:23:07
I I agree, you know, so so with with
00:23:09
with you know, GameStop, AMC, you know,
00:23:13
um you you you know,
00:23:16
you would you you would think that at
00:23:18
some point, right, the fundamentals that
00:23:19
are going to anchor the the price of a
00:23:21
stock with memecoins, it's not obvious
00:23:23
what that anchor is. And so, yeah, I
00:23:25
think I think they they really lean on
00:23:27
on on sort of similar
00:23:30
uh drivers for for for users, right? I
00:23:34
mean in this sort of sense of community,
00:23:36
shared narrative um in some cases this
00:23:39
this idea that um they're collect
00:23:42
collectively rebelling against
00:23:44
traditional uh powers. Um and and I
00:23:47
think that's that's very important to to
00:23:49
note as well and we see this elsewhere.
00:23:51
It's a great appetite for gambling.
00:23:53
Right. So, so I want I want to go back a
00:23:55
little bit to uh ICO initial coin
00:23:58
offerings and you mentioned that uh for
00:24:02
uh you know a few years ago there was a
00:24:05
wave of ICOs and I think at that point
00:24:09
there was hope that there is real
00:24:11
economic value behind it because those
00:24:14
are firms that instead of issuing equity
00:24:16
they are issuing coins and that is a way
00:24:18
to raise capital and it also supports
00:24:20
the products of of the firms but
00:24:23
Unfortunately, there was also a lot of
00:24:24
fraud that was associated with that and
00:24:27
then it came in to a halt and you know
00:24:30
now there's a lot of regulatory
00:24:31
uncertainty where it's going to go. Um
00:24:34
so where do you think we are headed with
00:24:35
that? You think there is still a future
00:24:37
for this?
00:24:38
>> When you say future for this what what
00:24:40
exactly do you mean?
00:24:41
>> Will we see the revival of ICOs? Uh is
00:24:45
it going to go back to the same uh
00:24:47
volume and momentum that we had in the
00:24:50
initial phase? I very much agree uh wi
00:24:53
with your uh with your assessment uh and
00:24:57
u but I I also want to point out that
00:24:59
there are some legitimate um legitimate
00:25:02
platforms uh that were uh built around
00:25:05
that.
00:25:05
>> Yeah, absolutely. No, I I think that
00:25:07
there were some of them that were
00:25:08
certainly legitimate, but there was also
00:25:11
a lot of uh fraudulent ones around them
00:25:13
and and and and the fact that it was
00:25:16
hard to tell which is which, I think
00:25:18
this is what caused uh the the crash in
00:25:21
activity.
00:25:22
>> I agree. I mean it it it was sort of
00:25:24
combination of that and um and you know
00:25:28
it kind of coincided not exactly but you
00:25:31
know roughly around the same time like
00:25:33
it the Teraluna debacle, the FDX Celsius
00:25:38
there there are a bunch of like notable
00:25:41
um
00:25:43
basic cases of of what you would legally
00:25:46
or otherwise probably classify as uh as
00:25:50
as as fraud. And so that that led to an
00:25:53
obvious response by the regulator, the
00:25:55
SEC. We kind of know what it looks like
00:25:57
under the current administration. I I
00:26:00
think the regulatory environment now
00:26:01
looks very different in the US. Um and I
00:26:05
think that's worth mentioning. And I
00:26:06
think that there's hope that under that
00:26:09
sort of new um framework there there
00:26:13
will be ways in which uh in which you
00:26:17
can actually do this with proper
00:26:18
disclosure and and guidelines and uh um
00:26:24
and basically consumer protection right
00:26:25
and that that's what that's what we are
00:26:27
concerned about right so um
00:26:31
you know now um D may be familiar with
00:26:35
the genius
00:26:36
um genius act which is standing for
00:26:40
guiding
00:26:41
guiding and establishing national
00:26:43
innovation for us stable coin act okay
00:26:46
um which is basically a framework for
00:26:50
how do you issue payment stable coins
00:26:53
and etc again I'm happy to talk more
00:26:56
about that if if you're interested in
00:26:58
but it and there's another even actually
00:27:01
more ambitious and and broader
00:27:03
um attempt to sort of clarify um what is
00:27:08
a security, what is a commodity, right?
00:27:11
Um under the clarity act and um and
00:27:15
provide safe harbor to developers and
00:27:17
sort of establish market rules and and
00:27:20
compliance rules etc. So um then these
00:27:24
two may actually get combined
00:27:25
eventually, right? And that's that's
00:27:27
part of the political uh discussion
00:27:29
that's taking place right now. And we
00:27:31
see very very kind of different
00:27:34
framework slightly but uh we see Europe
00:27:36
actually um being a bit ahead of the US
00:27:41
in in that way through Mika framework
00:27:44
which it's actually quite I mean it
00:27:46
doesn't cover everything but it's quite
00:27:47
comprehensive and and talks about again
00:27:49
guidelines for how do you um issue
00:27:52
tokens and stable coins and what custody
00:27:55
services look like etc. Right. So I
00:27:58
think that yes in the US the um
00:28:02
I think everywhere right we we've seen
00:28:05
some regulatory lag because this the
00:28:07
industry move very very quickly um I
00:28:10
think it's actually kind of fascinating
00:28:11
to see how quickly um the the the
00:28:14
evolution cycle in this industry are um
00:28:19
and there are some legitimate issues
00:28:21
around that or concerns around
00:28:23
regulatory capture and and regulatory
00:28:25
arbitrage but you know like I work as an
00:28:27
expert witness for for a number of
00:28:29
cryptoreated cases and and I and I see
00:28:32
how the level of um
00:28:36
sort of basically the level of
00:28:37
understanding um on the on the on the
00:28:40
supervisory and regulatory um sides.
00:28:44
It's it's it's very different from what
00:28:46
it was a few years ago. So I so I think
00:28:48
that you know there's some catching up
00:28:50
to do. Um but u but I'm hopeful that it
00:28:55
it's happening and I think that this can
00:28:57
can actually um lead to at least from
00:29:01
from from from an entrepreneur's
00:29:02
perspective a more sensible framework
00:29:05
that's based on activity and not based
00:29:06
on type of institution. Right? There's
00:29:08
certainly a lot more to talk about, but
00:29:10
I think we touched on the important
00:29:12
aspects of the economics of tokens and
00:29:15
what are some of the unique features uh
00:29:18
some of the uh complications uh some of
00:29:20
the regulatory uncertainty and it also
00:29:22
touches on some of the things that we
00:29:24
discussed in the other episodes this uh
00:29:27
season. Uh so thank you very much uh
00:29:29
Shimon for joining us.
00:29:32
>> It was a pleasure. Thanks for inviting
00:29:35
me.
00:29:35
>> Okay. Thank you and thank you everyone
00:29:36
for listening.
00:29:39
[Music]
