Tokens have come a long way from being a fancy concept developed by computer geeks dreaming about total decentralization to a billion dollar industry involving world-leading companies like BMW and Rakuten and various governments, including India. Lately, there have been a series of developments concerning the tokenization of various assets, ranging from stocks to art pieces and everything in between. Companies use these tokens as bonuses and loyalty points, tokenize their stocks, or some go even further by listing them on various exchanges. Is this becoming a trend? If so how did we get here and what is the next step?
What are tokens used for?
Regardless of what platform they work on, the concept remains basically the same: a token is a representation of something in its ecosystem. What can tokens be used for? For voting, for transferring value, or for giving access to something. Many projects now implement various types of tokens; more than 2,000 of them.
We can even divide all tokens into a few classes:
- Value exchange — This is the most common application that we can see nowadays. Tokens serve as a vehicle of value to create an incentive for users to use the system, becoming a part of an intricate token economy.
- Voting rights — Tokens can serve as votes, giving their owners the right to participate in the decision-making process within the system (setting fees for transactions, choosing representative nodes to process blocks, agreeing with applying various upgrades to the network — all these topics require voting). In various blockchains, such as Ethereum or EOS, voting works differently, but the common thing is that all of them involve tokens as the primary manifestation of their owners in a decentralized environment.
- Toll — In various decentralized applications tokens are used to gain access to various functions. For example, REQ burns tokens for each transaction.
- A representation of another asset — The US dollar, real estate, precious metals, even Bitcoin on another blockchain — everything can be tokenized and traded. Tokens represent the right of owning this tokenized asset in that case.
So that’s a great variety of tokens, right? All these classes of tokens exist in the current blockchain networks. But it wasn’t like that initially. There was no infrastructure at all.
First tokens, ERC20
Initially, Ethereum tokens didn’t have any common standard. It was really hard to issue any token or build it successfully in the whole Ethereum ecosystem. Interoperability and exchange required unification and in the early days of Ethereum, every issuer had to develop their own version for every function and to their own specifications, including functions for transferring tokens. So every token had to be dealt with in its own unique way, and exchanging one token for another required complex coding. At the same time, making one little mistake in the code could leave a vulnerability in the contract and allow malevolent individuals to use it to, for example, hack or freeze users’ funds.
On November 19, 2015, Fabian Vogelsteller proposed a specification (the 20th) that contained a set of functions that was well-received by the Ethereum community. From that point, issuing and trading tokens became a bit easier because it was now possible to create a proper infrastructure. It was enough for any exchange to implement a framework to support the new ERC20 tokens to add the thousands of tokens from new projects. That gave a green light to countless ICOs and the industry began to flourish.
- In 2016, ICOs raised $90 million.
- In 2017, ICOs raised $6.2 billion.
- In 2018, ICOs raised $7.2 billion.
As we can see, it’s a 68x growth from 2016 to 2017. It became the preferred way to raise money for a countless number of startups. ICOs became a hot topic and attracted attention to the blockchain, showing off its implementations and its potential.
Stablecoins entering the scene
While the market developed, it became obvious that it’s necessary to have the ability to trade all these tokens against fiat currencies. But why? Well, there are several reasons.
- Initially, tokens (or altcoins) were traded against Bitcoin, and that was the only available pair. However, Bitcoin is very volatile as well, so it’s necessary to take two prices into account when trading. This proved to be impractical for many traders.
- In the end, Bitcoin should be exchanged for fiat anyway, thus the goal of any trader or investor is to increase his portfolio against the dollar or euro.
- In times of extreme volatility, it’s dangerous to hold both altcoins and BTC; that may result in big losses.
- It was very hard to trade BTC to fiat instantly only to then reenter when the conditions of the market were improving.
So a stable asset, existing in the same crypto space as all other tokens, solved many problems at once. Tether (USDT) was the first stablecoin added to major exchanges, such as Bitrex and Bitfinex. A year later, new stablecoins (TUSD, GUSD, and USDC) were launched as an alternative to USD, each of them fully backed by real audited funds in a bank account of the company that issued its stablecoins.
There is still plenty room for many other assets — the current market capitalization of all stablecoins is only $2.6 billion, and the whole market is at $222 billion at the time of this writing, so there wouldn’t be enough stablecoins to close every open position on the market, if needed.
Gold and silver-backed stablecoins
After fiat-backed stablecoins, new projects started representing something else that was stable in the real world. And what might comes to mind when you think “stable” on the market? Gold and silver.
Precious metals are good candidates for tokenization, holding, and trading because their history extends for thousands upon thousands of years and they have the reputation of being a defensive asset.
Both gold and silver are presented by Kinesis stablecoins. Two coins, KAU (gold-backed) and KAG (silver-backed) are pegged to gold or silver bullion at a 1:1 ratio. If the price of the coin decreases, it’s possible to sell it for the bullion price, gaining profit. Or you could just spend it by paying with the Kinesis debit card anywhere Visa is accepted. This project is backed by the Allocated Bullion Exchange, leading exchange platform of physical precious metals for the better part of a decade.
The issuance and trading of stocks currently involves many parties — an underwriting bank that organizes IPOs, the stock exchange itself, a broker for the clients, a depository to store the stocks, and, of course, the regulators that allow the IPO to take place. The issuance of shares via the blockchain would be pretty much the same process, but it would allow using smart contracts, for example, to restrict large initial buyers from selling anything for a predetermined amount of time. It would also not be reliant on the exchanges and depositories that operate in their respective jurisdictions, unable to add foreign citizens to the lists of holders of their traded stocks without the proper infrastructure. It would, however, be possible to trade stocks via blockchain-based solutions all around the world.
The registry of owners would be unnecessary, because the token itself is a right of ownership and it can’t be falsified — or else it would be possible to create a global database with digital identities linked to certain blockchain addresses. Anyone would be able to see the list of any company’s shareholders, because the identities of the owners would be shared in the moment the stock was acquired.
The Malta Stock Exchange signed a partnership with Neufund to tokenize its stocks. It’s only a matter of time until more exchanges start to join as they come to learn of the benefits of this process. Although this doesn’t mean the death of the exchanges, because for the majority of users the convenience of use will always be of the utmost importance.
Tokens are used to access decentralized applications. They are used as vehicles to transfer fiat money, gold, silver, shareholder rights, property rights, voting rights, or whatever else people deem valuable. They are used as bonus points. Why is so appealing for companies to use tokens instead of good ol’ paper money? Because it’s easy to issue a token, the transaction is fast, and it’s nearly impossible to hack a blockchain address and steal stored tokens. All information written to the blockchain can’t be rewritten or erased, it can’t be falsified. In that case, all tokenized stocks, for example, can be stored securely on their owners’ accounts and won’t need any depository to take care of them.
With everything being tokenized and stored on the blockchain, it would be possible to instantly buy real estate, cars, art, or gold with the Kinesis Monetary System. Kinesis currencies will circulate not only in their established frameworks, similar to the New York Stock Exchange, but also on the free market.
Today, if you want to sell an apartment to buy stocks, you can’t do it in one step. You’d have to sell it for fiat money, deposit that money into the exchange, and only then will you be able to buy stocks. In the world of the future, you’ll be able to exchange a token, representing the ownership of your apartment, for a bunch of tokens that represent the shares of some company. Will it benefit anyone? Definitely! The instant exchange of value without any control will create new business models, save time, and allow people to pay fewer fees. All this can happen in a transparent environment. Isn’t that the kind of future you want to live in? We think so.
About the author:
Kirill Shilov — Founder of Geekforge.io and Howtotoken.com. Interviewing the top 10,000 worldwide experts who reveal the biggest issues on the way to technological singularity. Join my #10kqachallenge: GeekForge Formula.