Tokens are the fuel firing radical new models of business and finance; the impact on the global economic order has only just begun
Late last year, some may recall what may have been the cutest crypto trend to grab headlines: tradable and breedable ‘cryptokitties’. These were kitties born from the blockchain, each with a unique set of attributes, that could be cross-bred with others to produce offspring that expressed inherited traits, just like real cats. Although to some this may seem a frivolous application of blockchain technology, just compare them to real-life one-of-a-kind collectibles.
When excitement about the kitties hit a feverish high, the company raised $12 million from investors, and 1.2 million transaction took place between buyers, sellers and breeders every day, so many that it slowed down other transactions taking place on the Ethereum blockchain it’s built upon.
Cryptokitties are digital collectibles, due to their status as non-fungible tokens (NFTs) that can be transacted on the blockchain. ‘Non-fungible’ means that they are unique tokens, meaning although they can be traded in exchange for currency, they cannot be broken down into parts to be sold separately – their value derives from them being whole.
Now, kitties might seem boring (to deeply unstable minds), but what if the tokens represented real-life artefacts, like a piece of art, or a house? A van Gogh wouldn’t be nearly as valuable if it was torn in half. Or what if instead you could break your house down into a set number of fungible tokens, that you could then trade off for cash to create equity.
Tokens are what are used to transact value on blockchain platforms or ecosystems and they are opening up a new world of opportunity – there’s a reason they’ve been hailed as blockchain’s ‘killer app’. To explain why, take another example, that of ‘in-game’ currency or tokens that players can accumulate. Right now, the tokens that can be earned in games can only be used to buy in-game assets.
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What if, instead, you could swap these tokens on a real life (digital) exchange for money with people who were after more in-game currency?
And what if these weren’t games, but decentralised peer-to-peer marketplaces like Airbnb or Uber? And what if the value of these in-game tokens fluctuated in response to how popular these games or marketplaces were, causing their price to move in line with demand?
These ‘what ifs’ aren’t conjecture anymore, they’re the realities of the burgeoning token economy. While the interest in blockchain was (and still is in many circles) solely stoked by cryptocurrencies and their wild fluctuations in price, digital currency tokens are only one kind of token afforded by the blockchain.
Right now, there are three classes of token, each of which have different properties:
- Cryptocurrencies: tokens in the form of digital currencies
- Utility tokens: originally dubbed ‘appcoins’, these are tokens that are primarily used within the ecosystems of blockchain-based platforms. They hold internal value on the platform but can also be swapped for different currencies on exchanges. They can also act as ‘shares’ in blockchain platforms.
- Security tokens that embody value of real-world assets, for example, real estate.
Cryptocurrency has received its fair share of attention, so let’s examine the latter two cases instead: firstly, ‘utility’ tokens. Utility tokens are a little different to straight ‘coins’ given that they are more closely connected to one particular platform’s ecosystem, and in a way, also act as shares in that platform.
For example, bitcoin, the most valuable cryptocurrency, is not linked to any one platform or site. It can be used on many different commerce sites, but is not overtly linked to any of them. The tokens linked to particular platforms are a little different. Take as an example, the decentralised social media platform, Steemit. When launching, this platform held an ICO where people interested in the platform bought the platform’s tokens, ‘Steem’. Now, Steem can only be used for value transactions within the Steemit ecosystem. In this case, it’s used to ‘tip’ content creators or valuable posters on the site with micropayments.
“We believe tokens are the catalyst for re-imagining completely new constructs and building completely new systems,” says Sanaya Mirpuri, head of product marketing at Token Foundry. “We believe in projects creating token-powered ecosystems. So, not just payment tokens or tokens that people can pump and dump, but creating an ecosystem, where people can actually use the tokens.”
This can be traded for other assets within the particular ecosystem. For example, in Steemit, tokens can be traded on the ecommerce branch of the site for tangible products. Alternatively, these tokens can be traded on crypto exchanges for other cryptocurrencies, or for fiat money. This idea may not be entirely unfamiliar to those who play online or video games, given that these often incorporate some form of ‘in-game’ currency or token that can sometimes be purchased for real-world currency. The difference is that these ‘in-game’ tokens cannot be traded back into real-world currency at an exchange.
Secondly, let’s take the idea that these tokens can act as shares in the particular platform. This is because for many of these platforms, there is only a set number of tokens that can be mined, meaning the greater the demand for a token, the greater its value appreciates.
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This is due to the fact that most cryptocurrencies are modelled on gold, as every currency in the world used to be until the introduction of our current, ‘fiat’ monetary system.
“We believe there will be many use cases for tokens but what we’re witnessing is a dramatic shift in interest in the market towards decentralised systems,” says Mirpuri. “We believe at the heart of this movement is going to be tokenization. They have the potential to distribute value in a way that is more fair, secure, and even.”
In addition, on decentralised, blockchain-based platforms, tokens also give you ‘voting power’ as part of a member of a community.
In the absence of a centralised regulatory body, these ecosystems are often governed instead by the communities who create them. For example, in the decentralised Airbnb, Beenest, members of the community can put themselves forward to a pool of arbitrators who will decide on contentious issues, and for the decentralised news platform, Civil, the number of tokens held translates directly into the amount of voting power wielded on issues.
Smart contracts are another guarantor of trust in these ecosystems, which are layered on top of the blockchain protocol and follow the formulation of ‘if x then y’. Meaning for example, that payment tokens are not released to hosts on Beenest unless the stay has been completed without any complaints made. This removes the need for long-winded legal legislation and arbitration.
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So, utility tokens are clearly the product of entirely new business models, but what about security tokens? These tokens provide a new way to represent assets, and new, much easier ways to transact with them, afforded by the blockchain.
In this case, tokens are not creating new systems, but simply offering a way to improve the current system. In the securities markets, blockchain offers the same huge advantages it offers everywhere: removal of the middlemen which means drastic reduction in fees and transaction costs, which in turn vastly decreases the time taken for transactions and the associated bureaucracy.
This will also have the effect of opening up investment globally, as trading will be accessible to anyone with an internet connection, and consequently increase the pool of potential investors. It will also democratise investment to some extent, offering the ability for small-time investors to participate more easily in securities markets.
It also has a huge effect on liquidity – the speed with which assets can be bought or sold.
Again, in these systems, trust would primarily come from smart contracts baked into the system, rather than lawyers.
“The writing is on the wall,” says Vincent Molinari, CEO of Templum Markets and a founding principal and chair of 5th Element Group. “The digitisation of securities is the solution to create a whole new level of access to capital for innovators and growth companies, while creating new opportunities for investors to ‘wealth create’, and fundamentally change the nature of how finance becomes democratised.”
Ripple is a blockchain startup, whose product, xCurrent – designed to make the checking of information required for transactions much easier – is already being used by a number of big banks, such as Santander.
xRapid is a newer product, and one which relies on cryptocurrency (aka tokens) to work. This product has its application in emerging markets, where pre-loaded local currency accounts are generally required for payments – pushing up transaction costs and time. Instead, xRapid will quickly convert (with a transaction time of four seconds) fiat money into a cryptocurrency, XRP, to move it through the system before converting back into whatever the required currency is at the end. The CEO commented that he expects the product will be used by most major banks as a liquidity tool by the end of 2019.
It’s incontestable value like this that ensures crypto is going to be around long into the future. Simply put, utility and security tokens are the fuel firing radical new business and finance models, and the impact on the global economic order has only just begun.
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