Tokenizing All The Things
We hear a lot about how blockchain technology facilitates tokenization of different kinds of assets, but what exactly does this mean? To understand this, we have to first understand exactly what money is.
Money has many roles, such as a store of value, and a way of accounting for things. In everyday use though, money is our means of exchange - and this makes it very different from other forms of wealth such as property.
The money we use every day used to be pegged to the value of scarce resources, usually gold. However for many years this connection, the gold standard, has been removed in most developed economies - so now the value of money comes from the policies of the national reserve banks, combined with the network effects of global usage. A dollar is worth one dollar, or 0.85 euros, because we all accept that this is so.
We call this fiat money: something - like a coin or bank note - made legal tender by government decree.
The world has other assets, with real intrinsic value - precious metals, fuel, food property, works of art, gemstones… But these are not easy to trade and exchange, to physically transfer or to subdivide. In many cases they are not fungible either, an important distinction in law: One bar of gold can substitute for any other and the value remains identical, but for apartments or artwork this does not apply. And even fungible bullion has to be stored securely, transported, and insured. We say that such assets are “illiquid”, because their value cannot easily flow, from one place or owner to another. It would be impractical or costly to transact with such things in everyday life.
But what if we could unlock that value, if we could fractionalize it, transparently and securely? Then people who are rich in assets but poor in cash could become economically active, and they wouldn’t necessarily have to sell up and liquidate those precious assets either.
Blockchain-based tokenization is the answer. We have technology emerging now which enables us to quantify, divide and trade in tokens of real-world assets.
Tokens are in some ways the opposite of fiat money, simply because they are backed by something real. They are like shares of ownership, in something physical. They are often called ‘security tokens’, and blockchain-based tokens are similar in some ways to traditional securities like stocks, which are traded digitally in the world financial markets every day.
There is also similarity to the process of securitization, where financiers batch and bundle fractional ownership of various assets. This has existed for hundreds of years, and is not without its problems. In fact, securities can get completely decoupled from their connection with the real world - as in the 2008 financial crisis, when trillions of dollars worth of collateralized mortgage loans were securitized, and were then bought and sold with no consideration of their real underlying risk profile.
So the key challenge for any system that involves tokenizing real-world assets is to ensure that the digital token stays directly connected to the real-world asset. This is where the immutable, tamper-evident technology of the blockchain makes the difference, employing distributed ledger technology with smart contracts, to directly quantify ownership and allocations in real-time. Of course this will in many cases need to be combined with robust off-chain due diligence, to create a total system of real-world asset tokenization which complies with local law in relation to real estate and ownership.
And real estate alone is valued at $217 trillion worldwide: imagine the impact on the global economy, of unlocking all that value! So few people in the world, relatively speaking, will ever own any kind of property - not least as to do so generally requires you to have significant cash to deposit to start with, top-notch credit to secure loans for the rest, and a readiness to pay transaction costs of typically 10%.
But what if you did own a home - but had no cash income for a time. Perhaps you could sell tokens in your house, use it as collateral for a loan through a smart contract? Tokenization has benefits both ways.
And it isn’t just tangible real-world assets like property which could be tokenized either. You could just as easily buy a share in the output of a musician, so that they can fund original creative work. Or band together with a community group to collectively purchase an original artwork for a local museum.
Or maybe invest in the rare-breed herd of a nomadic tribe who have never owned property throughout their history - but by unlocking the value of their carefully-nurtured livestock, could afford to send some of their younger generation off to study the latest veterinary techniques? So many assets of unbanked populations are spectacularly illiquid, as well as vulnerable to theft, loss, land-grabs etc.
Imagine those same people, who might be amongst the poorest in the world in cash terms, quantifying and tokenizing their assets on the blockchain via a simple feature-phone app, which enables them to use those assets to pay for basic amenities, insurance against natural disaster, collateral for loans, and investment in new equipment...
What about the tokenizing the infinitely unappreciated labour of home-makers and carers worldwide? Many of the most fundamental inequalities in the world could be mitigated. No wonder the institutions which control the world’s wealth are feeling so directly threatened, by the potential for such disruption.
Governance models, institutions, will have to change. In a peer-to-peer tokenized world, our concept of ownership will be due for a radical overhaul. And we all know that regulation changes far more slowly and reactively than technology does.
But you can already buy gold using Digix tokens. Digix uses a Proof of Asset protocol, to certify the the chain of custody of the actual bullion, creating asset cards certifying the vendor, custodian and auditor, written into the Ethereum blockchain, and the Digix-DAO is exploring new applications for this model going forward. Or you can buy shares in upcoming musicians, via Imogen Heap’s Mycelia, or a fraction of an unbanked subsistence farmer’s livestock using Sentinelchain.
The future is here already. Imagine when value can truly flow, frictionlessly, from any point to another, and the true potential of every asset and activity can be digitally unlocked.
Then the potential of the blockchain will truly be realized.