Money Is What Money Does: Asset Tokenization Via Blockchain
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Asset tokenization is the next logical step in the technological evolution of commerce. It is the quantum leap that will enable us to transcend the fiat currency centered view of economics into a new, paradigm-shifting, ledger-centered cryptoeconomics.
Attempts to build better solutions for the facilitation of commerce can be observed throughout the whole course of human history. We learned to trade as soon as we learned to communicate – and we literally never stopped. Not even in times of war. The trade of goods and services is what expedited the rise of civilizations; cities that employed the soundest economic theories in practice and produced the greatest technological innovation in the commercial sector flourished, while the ones that didn’t – perished.
Today we’re witnessing the rise of a completely reinvented, fully digitized economy. The advent of cryptocurrencies made Hayek’s dream of “the denationalization of money” real. Or, at least, made it possible. But how did we get here? And more importantly, where are we headed? Is Bitcoin really the best we can do? Can a blockchain-based cryptoeconomy go beyond money? If we ought to understand the future, we need to take a look at the past.
The (r)evolution of money
We all think, somewhat intuitively, that we know what money is. After all, money rules the world; we spend most of our lives thinking about money so, naturally, we must know what it is, right? Well… not really. If we set aside the simple, perfid definitions that come to mind, the enigmatic phenomenon of money along with the most fundamental questions of its nature and function are without a satisfactory explanation even to this day.
Money is not a thing. Money, or better yet moneyness, is a feature. We say that something is ‘money’ if it can be used as a unit of account, a store of value, and a medium of exchange. Even though, historically, stones have been used as money, the concept of money is not set in stone. Money, as we come to know it today, is a product of a long evolutionary process.
In the beginning, there was no money. Humans, instead, engaged in barter and exchanged goods and services directly. This primordial method of commerce works well only on a small scale, and requires a coincidence of wants (supply, skills, preferences, and time) between the traders. Although barter is far better than no trade at all, the costs of transaction made barter an extremely inefficient method of commerce.
The earliest forms of commodity money emerged as a result of the effort to solve the aforementioned coincidence of wants problem. Some commodities (such as salt, cocoa, sugar, tobacco or cloth) were – because of their utility – accepted by all, and therefore assumed the role of currencies – circulating as an element of exchange and standards (étalon) of value for other goods and services.
From the use of commodities as money we upgraded to the use of collectibles as money, which had an enormous impact on the ability to trade between primitive humans. Collectibles such as cowry shells (wampum) were used as a medium for storing and transferring wealth, which greatly improved the workings of small barter networks. But, we were not there yet; as we evolved – money had to evolve.
From collectibles we moved onto bronze casts of replica knives and spades which, in turn, transformed into the first ever forged coins to be used as money. Fast forward: we adopt paper money, enforce the gold standard only to abandon it years later and appropriate fiat money, we get bank cards, credit cards and, finally, with the introduction of chip technology – electronic money.
But, if cowry shells can be money, salt and sugar can be money, gold can be money, 1’s and 0’s can be money, and so on… What is money exactly? It’s clearly not just coins or banknotes issued and backed by a government under legal tender laws. Money is an emergent, evolving institution in an economy. Money is, what money does. In law, money is defined as legal tender, but in practice – it can be anything. The moneyness of an item can be derived from its scarcity, trust or utility – but the reason we use money is because we need an institution, a technology – a dynamic ledger that facilitates accounting.
Narayana Kocherlakota, professor of Economics at the University of Rochester and former president of the Federal Reserve Bank of Minneapolis, argues that money functions as a substitute for perfect recordkeeping devices. If this is true, then we must ask the question: now that we’ve come up with the perfect recordkeeping technology (the blockchain), do we still need money to transact?
Back to the future
The birth of Bitcoin in 2009 marked a beginning of a new era in monetary economics. Bitcoin is the primum movens, the first gunshot to start an ongoing revolution – a fight for the denationalization of money. It marks the beginning of the end of a long rule of state-based money; an end to the fiat currency monopoly; and a paradigm shift in monetary economics.
Only nine years after Bitcoin’s debut, we have over 1500 cryptocurrencies with different monetary policies, use cases, and philosophies, competing with each other on the free market. All these ideas and concepts of money are fighting for the throne, for the number one spot in the Pareto distribution. A prime example of this battle between monetary philosophies is the blocksize debate within the Bitcoin community; years of forum debates and nasty behind-the-curtain politics were finally settled with the colossal event known as the Bitcoin Cash fork.
The rising tide of expensive transaction fees polarized the crypto community, dividing it in two opposing schools of thought. In short, the advocates of the small block status quo valued Bitcoins function as a store of value more than its function as a medium of exchange, and argued that the increase in blocksize will lead to greater centralization of miners, which goes against the zeitgeist of Bitcoin. Big block supporters argued that increasing the block size will lead to smaller transaction fees, which will, in turn, lead to an improvement of Bitcoin’s function as a medium of exchange and honor Satoshi’s true vision.
So, who was right?
It doesn’t really matter. That’s the whole point. We can now test different monetary models, different ideas about what money should be and see what works and what doesn’t. For the first time in history we have the luxury to choose from an abundance of competing models of cryptocurrencies. Want to go rogue? You can go for Monero, Zcash or Dash. Want to develop dApps? You can choose between Ethereum, Cardano or NEO. In fact, you don’t have to choose, you can use them all. This is what the crypto movement is all about. Freedom.
This ongoing battle of ideas in the cryptocurrency market is a manifestation of a healthy process of natural selection. The projects and ideas with the highest added value for society will be the only ones to survive and, in the end, leave us with far better money than we ever had.
In fact, one could argue that this process of natural selection which came about as a result of the denationalization of money enabled us to make – thanks to the invention of smart contracts – the transition from electronic money to programmable money. This may be a “small” step for money, but it’s a giant leap for mankind.
We soon realized, anything we consider “wealth” can be represented on the blockchain.
The ICO bubble is only a spoiler of what’s about to come
The birth of the “new economy” is being demonstrated by the abundance of speculative ICOs dominating the markets. The ICO bubble, however, cannot expand into infinity; sooner or later it will burst and erase the vast majority of meaningless crypto projects with its implosion.
The Big Crunch will wipe out most of the meritless tokens and leave us only with an idea, with the concept of tokenization of assets. An idea that will likely take us beyond money and back to barter.
The blockchain is the master enabler of the old idea of tokenization of assets. Features like integrity, robustness, accessibility, immutability, and intelligibility make the blockchain a nearly perfect accounting tool. For the first time in history – with the advent of ingenious emergent consensus protocols – we managed to abolish our reliance on third trusted parties like banks and clearinghouses, giving rise to the possibility of a truly global and borderless P2P commerce.
We abandoned the barter economy because trading cattle for houses just wasn’t practical, standardized, or scalable. Today, however, anything can be represented on a blockchain by a distinctive digital identifier called a token. Transferring the information from a real-world asset onto the blockchain allows ownership rights to be transmitted and traded on a global and secure digital platform.
The tokenized world
The introduction of digital tokens to an economy – besides the obvious function of “representing real-world assets on the blockchain” – increases the complexity of the economic system by an order of magnitude. This process of asset tokenization creates a number of beneficial emergent properties: globalization, asset alchemy, programmability, and a massive increase in the liquidity of assets.
- Liquidity
Tokenization of assets will create a more liquid world and drastically change the dynamics of global trade for the better. All economic assets exist on a spectrum of liquidity. Once an illiquid asset (e.g. real estate) is tokenized on the blockchain, it instantly becomes easily tradable on the markets and shifts to the opposite endpoint of the spectrum, becoming as liquid as an asset can be.
This process of tokenization has massive advantages. First, the tokens can be divisible up to 18 decimals (or much higher, if required), which significantly lowers the ownership barrier to entry. By the tokenization of an illiquid physical asset, you can now be a proud co-owner of a fraction of a valuable piece of art like the Portrait of Adele, or a precious stone like the Pink star diamond. Furthermore, your ownership rights are embedded on an immutable digital ledger which tracks and records the history of the asset every single time it changes hands. Our ability to trade real-world assets on a global scale will massively increase due to this “new found” liquidity. Which brings us to our next point…
- Globalization
When tokenization of assets reaches global saturation in the not too distant future, the global trade of (previously) illiquid physical assets will become an everyday reality. We’ve already made the first steps towards global commerce with the ICO crowdfunding model, which removed many of the bureaucratic barriers of IPOs and made funding simpler, borderless and direct.
As assets become increasingly tokenized, global trade becomes less difficult, and an opportunity for developing new markets for previously under-utilized, illiquid assets opens up. Furthermore, tokenization of assets – with the help of smart contracts – will create a new asset class of smart assets with embedded features like voting, distribution of dividends, and fast transfers of ownership. As a result, people from different corners of the world will be able to own fractions of the same physical asset or exchange different kinds of assets directly and instantly.
- Programmability
Programmability means that once an asset becomes tokenized on the blockchain, we can now add all sorts of metadata to it. We can track previous owners, locations, various stats and analytics, add images, reviews, videos, opinions, legal documents such as insurance policies, contracts, land titles, cadastral documentation, and so on. Moreover, blockchains are immutable, censorship-resistant, and transparent, which makes them the perfect platform for the facilitation of global commerce.
- Asset alchemy
The most disruptive feature of asset tokenization is its potential to create new kinds of assets. We can tokenize intangible assets like intellectual property, artistic creations such as writing, music, paintings or videos.
We’re already seeing projects like Golem that tokenize computational power, or different projects that tokenize data storage space or votes in online prediction markets. Tokenizing artistic creations is empowering individual artists while disempowering large publishing corporations, giving creators better control over their finances and direct contact with their customers.
Furthermore, we can, theoretically, tokenize ‘assets’ that are not traditionally considered assets at all.
Imagine being able to tokenize your future time, your medical data, the data containing your shopping preferences or your social network, and then make different industry stakeholders bid for it? It seems beyond futuristic, but it’s certainly not impossible.
Beyond money
The most fascinating emergent property of tokenization is that, in a tokenized world, we don’t really need money to transact. Money and money prices are just an enabling technology. Barter markets were initially supplanted by money because it was, then, the only way to bridge the coincidence of wants problem. Tokens – the digital representations of assets on blockchains – can now accomplish all three functions of money with ease.
A tokenized, highly liquid global marketplace may reduce the need for money as trade intermediary. We can, hypothetically, completely eliminate money (even money prices) from transactions.
Moneyness is a feature and, through the process of tokenization, any traditionally illiquid asset can acquire money-like properties.
Tokens enable us to swap, or barter exchange across two or more items or sets of items directly. Any piece of data that can be permissioned and controlled with a private key within this crypto ecosystem can essentially become an exchangeable property.
If we want to expand upon this idea even further, one can argue that this direct barter system is better suited for machine-to-machine interaction rather than human-to-human interaction. This is, in fact, the philosophy behind the Internet of Things concept. With the use of blockchains, tokens and smart contracts, we can completely remove humans from the POS, or even go beyond, and remove humans from the whole equation and let autonomous machines barter between each other.
Tokenization will undoubtedly redefine the way we handle assets, and change our perception of money, wealth and ownership in ways we cannot yet imagine. Surely, there are major obstacles on our journey to the future: we need to find ways to securely and efficiently map/link the tokens to the real world assets, scale our existing DLTs and wrap our heads around all the possible legal ramifications and build an adequate regulatory framework…
But if this vision of a fully tokenized digital barter economy becomes fulfilled, one thing is certain.
Our world will never look the same.
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