The birth of blockchain has sparked a new wave of thinking in innovation and technology, disrupting traditional systems of business economics. The advent of these emerging technologies is reshaping the world’s socioeconomic landscape by streamlining the entire information network paradigm. Today, with a market capitalization of close to US$ 2.2 Billion, there are over 100 projects that are betting on this technology’s equation.
One of these emerging technologies that blockchain underpins is tokenization. The concept of tokenizing assets in blockchain is just about gaining traction around the world but at a steady pace. So what is tokenizing and what’s in it for us in the future years to come?
Tokens vs Coins
The term tokenization in broad sense has multiple interpretations which often confuse people, but, when applied to blockchain, tokens are units used to denote a certain value of an underlying asset. Often times the terms tokens and coins are interchangeably used to refer to digital assets within the cryptocurrency community. Hence, at the very outset, it is rather important that we establish the difference between a coin and a token with respect to its modus operandi. Although tokens work like digital cash, they have a wider functionality and use case.
Coins are cryptocurrencies that independently operate on their own blockchain platform or distributed ledger, example Bitcoin, Bitcoin Cash, Ripple Litecoin etc. On the contrary, tokens work on another platform such as Ethereum to exist and operate. In other words, tokens are digital assets that leverage an existing coin’s blockchain network. Some examples of tokens are Omisego, Golem and Augur. With this we can safely settle the clear distinction of a token from a coin, in that, cryptocurrencies that run on an auxiliary platform namely Ethereum are not coins but rather tokens, and tokens perform similar functions as coins but they are also used to represent digital assets.
Tokenization of Assets
Tokenization of an asset refers to the process of attributing a certain value to represent that asset in the form of a token. For example, a person may purchase a certain portion of real estate using tokens via a smart contract, and as a result of this purchase, these tokens give the holder a certain fraction of rights to the property. Much like a coin it can be used as a means to trade, pay or even transfer value within the blockchain ecosystem, however, for the specific purpose on which they are designed, tokens hold the advantage of gaining value, beyond the intrinsic value that coins offer, for the reason that they are backed by a wide range of assets, such as shares, bonds, real estate or even paintings. So how is this beneficial to us? Why has tokenization of assets been gaining such popularity in the past few years? And how is it going to change the future for economic development?
Building Token Economies
Tokenization essentially means conversion of any asset into a digital token. This means that when you trade a token, you are also trading the asset that is backing that particular token. The alluring characteristic of a token is that it can be used to account for exchange or validation of any form of asset by attributing a specific value. These assets can be gold, shares, property, energy or even the number of likes a person has on social media. Tokens represent a democratised participation of rights through a decentralised web network for the reason that anyone or everyone has the right to access digital tokens. Be it an investor, farmer developer or even a taxi driver. This feature of a holistic functionality and utility that tokens entail is what is impelling nations to build token economies.
Thus, the catch here is that tokens are generic and fungible in nature as they can be used to assign values to broader concepts such as social capital, natural capital and cultural capitals, in that it is more generic in nature as against monetary currencies. In a broader sense, tokens can be used to express social values, which monetary currencies fail to do.
As newer technologies try to find its ways to penetrate and break through its relevance across the globe, Dubai is vehemently embracing blockchain technology for multiple applications. Termed as the “Blockchain Capital” of the world, Dubai seems to be receptive and raring to go on new technological prospects that blockchain entails, much like the concept of tokenization. With more and more countries providing avenues to host summits for blockchain solution providers to advocate the relevance of tokenization today, the adoption of a tokenized economy is following a similar trajectory.
Dr Habib Al Mulla, chairman of Baker McKenzie said “Investing in asset-backed tokens is less risky. This is because the asset-backed tokens are supported by tangible, underlying assets that have an intrinsic value, such as company shares or even property”. He further said that regulators in financial free zones are already being receptive to digital payments.
However, needless to say, everything has its pros and cons. From a regulation and adoption standpoint, there is still a great deal of inhibition that needs to be broken among early adopters, regulators and the general public, to see through the potential significance of this tokenized economy. Regulators are trying to wrap their heads around this new technology and it is only a matter of time till we see a full-fledged consensus-driven system that is transforming real-world assets via tokens.
Tokenization has the potential to put an end to the notorious divide between capitalists and workers, by achieving goal congruence, in that individuals in an organization are driven by the value of a single token ecosystem through maximum participation.