Economies are first and foremost about value, what humans value and how we strive to achieve the things we value. To have an economic system the first step is to take account of this value that is in the system. The foundations of economics is being able to securely represent the underlying resources and exchanges within the real economy in some information system and then being able to exchange, analyze, distribute or otherwise alter it in various ways. The critical aspect of this process is that the information accounting layer remains true to the underlying assets and exchanges within the real economy. Of course, many people will wish to alter these records to their advantage and thus we need some trusted source for maintaining and verifying them.
Previously we have relied upon centralized institutions to take account of and vouch for the authenticity of these records of value. However, the secure and trusted nature of blockchain networks makes it possible for us to directly associate the value of a real-world asset with a programmable asset and we call this tokenization. “Tokenization is the process of converting rights to real-world assets into a digital token on a blockchain.”1 Previously we could not create trusted records of value without the support of centralized institutions. Creating token systems at large scale has previously been the purview of states and empires. The implication of having an automated distributed system like the blockchain is that everything could be securitized by everyone, as we greatly expand our capacity to define, measure and exchange value of all kind. We can now set up blockchain networks that can store records of value and be trusted by members involved without anyone actually controlling or really owning the network.
The implications of tokenizing assets are many fold. Firstly we are no longer dependent upon lengthy and often expensive bureaucratic procedures for the registry of valued assets. People can literally securitize their own assets and have them validated by the network. Secondly, we are no longer confined to assets that are large enough to be worth some centralized institution recording and tracking them. With digital technology, the cost of doing this is so low that we can securitize almost anything and with personal and mobile computing people can do this themselves. Thirdly with parallel advances in big data and pervasive sensing, mobile computing and social networking we are now able to track more types of value that previously went unaccounted for and assign tokens to them. Lastly, the implications of blockchain tokenization should be considered, as token economies shift the locus of power both outwards to the individual and to the networks that manage these economies. Previously we invested a massive amount of power and control within centralized organizations as they were the ones that got to define value within society and economy, but with token economics, the management of value records and exchanges shift to information networks with huge implications.
Centralized systems of organization for the recording and validation of assets have advantages, but they also have many limitations. Because they are centralized they create bottlenecks; there are a few people in the center trying to serve a large population. If the administration is well developed this can work to a certain degree; land registry in places like Germany and Singapore may work well but for most of the world it does not. In places like India or Africa centralized institutions are overwhelmed and under-resourced to provide for the mass of people and as a consequence, the majority of our global economy is undocumented and informal; not having access to legal rights, financial services etc.
Likewise, centralized systems require many layers of hierarchy and regulation to ensure that people are acting according to the mandate of the organization. As the system gets larger more and more layers of bureaucracy build up. Take for example the administration of organic farming in a country like Ireland, there may be an organization for assessing and certifying the farmers, which will be assessed in turn by some national body which may, in turn, be assessed by the European Union. These different layers of bureaucracy create high overhead costs and over time create inertia.
Cost of Transaction
The formal proceedings of large bureaucratic systems is often overbearingly complicated and expensive for people to avail of them. For example, If you look at the administration that lies behind trying to issue 100 million shares and all the different institutions, you have to pay to keep shares and register them, to distribute them, keep track of them and regulate the whole system. It takes an enormous amount of work effort and cost, thus most companies don’t get to access global capital markets via the offering of shares. With the tokenization of assets, they move on to digital exchanges where they can exchange a very low cost and in very small increments. Something like a building can be tokenized and instead of having to buy the whole building with huge legal and regulatory overhead costs you could now purchase one square centimeter of the building in seconds with very little overhead cost.
Thirdly, information technology is expanding our capacity to quantify value and tokenization enables us to capture different forms of value; social capital, natural capital and financial capital. The thing to appreciate is that this is not just about the blockchain, this paradigm shift in economics is possible because of very fundamental changes in information technology that go far beyond the blockchain itself. A key aspect here is datafication, the fact that we are quantifying and turning more and more aspects of our world into data. In a world of scarce information, we were limited in what types of value we could quantify and how much we could keep track of. But in a world of pervasive information and communications, we find that we are spontaneously quantifying and tracking all sorts of new forms of value that previously when unaccounted for, social networking is one good example of this. Token systems enable us to ascribe value to everything that we value and create markets around that.
One of the great advantages of token economies is that we can create token networks for the things that people value. In our existing economy, we are fully dependent upon centralized institutions to define value. Centralized institutions will only do things that are in their interests if something is not in the mandate or interests of a centralized organization we find that it will not get done. We may find that it is not in the interests of any centralized organization to remove the trash from the side of the road but by creating a token system, we could incentivize people to clear the rubbish. In a traditional free market system, we may not be able to place a value on the functionality of an ecosystem, and the government authorities may have every incentive to simply sell out the nations natural resources, but by creating an eco token we could try to capture and manage that value via the token network. Take for example Plastic Bank. The Plastic Bank creates social and environmental impact in areas with high levels of poverty and plastic pollution by turning plastic waste into a currency.2 By enabling the exchange of plastic for Blockchain secured digital tokens, they reveal the value in plastic. This empowers recycling ecosystems around the world and stops the flow of plastic into oceans by creating a market that connects those who can use plastic waste for recycling and those who have time to collect it.
The capacity for communities of people to directly define what they value and create economies around that without depending upon a centralized institution to do that for them is truly revolutionary. It is truly a restructuring of the very fabric of our civilization with massive implications and repercussions that will take decades to play out. It removes current bottlenecks that have limited the availability of formal economic and financial structures to a small minority of the global population and makes it possible to extend the most advanced and sophisticated legal frameworks and market systems to anywhere on the planet. It enables us to extend the exchange of value and market mechanisms to very small high volume exchanges, such as between machines and computers. It allows communities to define what it is they value instead of that being decided by a centralized authority and it allows us to incorporate a broader spectrum of values into market exchanges.
NASDAQ.com. (2017). How Tokenization Is Putting Real-World Assets on Blockchains. [online] Available at: https://www.nasdaq.com/article/how-tokenization-is-putting-real-world-assets-on-blockchains-cm767952 [Accessed 21 Mar. 2018].
Plastic Bank. (2018). Stop Ocean plastic. [online] Available at: https://www.plasticbank.org/ [Accessed 21 Mar. 2018].