Tag: tokenization

TOKEN SERVICE NETWORKS

In just the past few decades our world has been radically changed by the development of almost invisible layers of information networks that now wrap around the planet connecting ever more people into common exchanges.

Telecommunications has connected us. Online platforms have provided the coordination mechanisms for organizing more and more spheres of our lives.

But now a new dimension is being added to this as blockchains enable us to securely record and exchange value automatically and with low friction.

It is when we put all these components together that we get the infrastructure for truly rethinking and redesigning economic and enterprise structures based upon open dynamic networks.

Information technology, telecommunication networks, online platforms and blockchains are enabling us to create ever larger systems of organization for economic production and exchange. Enabling the switch from closed organizations competing to open networks with these networks being organized via market mechanisms.

The blockchain, through smart contracts, lowers the information costs and transaction costs associated with many interorganizational contractual arrangements. And so expands the scale and scope of economic activity that can be undertaken.

It allows markets to operate where before only large firms could operate. And it allows businesses and markets to operate where before only government could operate.

Previously institutional structures and technologies worked to strengthened coordination and cooperation within organizations leading to the formation of ever larger centralized operations.

Large-scale differentiation of labor was a key innovation in the enterprise that greatly expanded during the industrial revolution. With mechanized automation individuals could focus on repeatedly performing the same operation rapidly with those diverse activities being coordinated through production processes. Meaning that it was now not any one individual that produced things, but instead the whole organization.

We saw the development of the very large enterprises of the industrial age, such as the corporations that were hired to build the American railroads, with ranks of salary middle managers expanding as fast as the tracks were being laid down.

This industrial model for the generation of value is largely a product of two factors. Firstly, the centralization of production and economies of scale that is inherent to an industrial economy.

And secondly, it is also a product of the relatively high cost of collaboration and communication.

In order to achieve the mass scale that the industrial environment selectively favored, standardization and predictability were a key component. Within this model, there is a strong divide between producers of value and consumers.

On the one side, we have formal well-bounded professional organizations. By aiming to maximize their efficiency, they include only the people who are most productive.

On the other side, we have the consumers who consume the products and services made by the professional organizations. There is a strong divide between producers and consumers, professionals and amateurs, work and play.

Today information technology is changing the very foundation of this dynamic. Blockchains radically reduce the cost of interaction and collaboration between organizations, compared to within them. Thus, the natural size of an organization can be far smaller.

So, once large enterprises have tokenized, then it will also be natural for them to split into smaller and smaller entities, and to reform as needed.

The distinction between the inside of organizations and their external market economy will become increasingly eroded as networked forms of coordination span across traditional boundaries linking inside and outside in a greatly more fluid fashion.

This will have a very profound effect on the overall structure of our economies, as they go from many closed organizations competing within markets to the emergence of large ecosystems of collaboration along whole supply chains and within the provisioning of complex service systems.

Indeed the last few decades with the emergence of the internet has already seen the formation of large business ecosystems.

Eamonn Kelly of Deloitte consulting describes this transformation well when he notes “ecosystems today are doing nothing less than redefining the shape and structure of the economy. They’re increasingly determining business success and business failure. They’re enabling massive and rapid innovation around the world and essentially they’re playing a very, very critical role in shaping the future of our society… Essentially boundaries are blurring everywhere, the boundaries between what large firms and small firms can do. The boundaries between industries and sectors. The boundaries between organizations. The boundaries between technology domains. The boundaries between producers and consumers. Where consumers used to be passive recipients now they’re active participants in the economy… We’re now living in a world where there are more nodes across more networks with more specialized capabilities and above all this extraordinary ability to connect them, to collaborate, to co-create across these systems. That’s the fundamental shift that’s restructuring economies and I think is actually going to fundamentally change our society.”

SERVICE ECOSYSTEMS

Recently an important idea has been gaining acceptance within the business community, the idea that businesses of many shapes and sizes can thrive and serve customers better as participants in ecosystems. More diverse and collaborative, more adaptive and agile than traditional industry structures and supply chains.

The term “ecosystem” is a useful metaphor that points to a deep interdependence across players as they Co-evolve and together create and share resources.

Many of these ecosystems are built on top of powerful platforms that facilitate connectivity and invite the active participation of a large number of other players.

Businesses that understand ecosystems and how they work are discovering exhilarating new opportunities to co-create new value streams with multiple players often including customers. They achieve this by harnessing the new coordinating power of advanced technologies to create scale and serve untapped markets, faster than ever before, work with others to meet important human needs and by delivering complex services in ways that would be beyond the capacities of any single organization. They attract and activate passionate communities of talented individuals and organizations and accelerate learning and innovation. To understand the potential of this idea we need just think of one relatively trivial example.

Imagine all of the drug companies having the means and incentives to collaborate on producing a single best drug instead of 90% of their resources being wasted competing while only one gets to patent a new drug.

ARCHITECTURE

With the shift towards token economics, our economies will evolve from the traditional model of the industrial age, based around centralized closed organizations competing, to more user-generated systems that both collaborate and compete within large open networks.

The critical change that will come about will be the move towards a service-oriented architecture to whole macro economies and indeed the global economy as a whole.

As the strength of these open trusted networks grows and connectivity proliferates the centralized organization will become unbundled along many dimensions and the product based, push model of competition of the past will evolve into a dynamic, plug and play networked model that works to aggregate modular on-demand services around the needs of end users. Over time those service-oriented blockchain based networks will become increasingly automated through the development of smart contracts.

In a recent article from the RMIT Blockchain Innovation Hub, the authors write “for many industries, the blockchain will radically redefine the boundaries of the firm, allowing individuals to trade their talents and skills in an environment devoid of big business. The eclipse of the large public firm has been predicted before, of course, but this time we believe those predictions will eventuate for many, if not most, industries.”

The organizational paradigm of the token economy will be large service networks. Digital networking technologies enable networks to overcome their historical limits. They can, at the same time, be flexible and adaptive thanks to their capacity to decentralize performance along a network of autonomous components, while still being able to coordinate all this decentralized activity towards a shared purpose.

A huge structural change that is coming about as we move into the information services economy – base on these information networks – is the shift from static structures to dynamic flows of value as the organizational model.

Unlike the industrial economy that was based on fixed structure such as the formal hierarchy or products produced, a service and token economy is one that is fundamentally based on value delivered.

The organization is not based on fixed structures, roles or boundaries, but instead is based more upon value produced and exchange, this value can be defined in terms of services. From this perspective, the organization is a network of value exchange and the members of the organization are those that provide value, the service providers.

MICRO TRANSACTIONS

Existing centralized companies when they design their products they have to design around the constraints of the existing fiat currency system.

Although not often noticed this, in fact, has a lot of limitations as transfer costs are high. They are slow that’s why we pay employees at the end of the month. It is for this reason that we don’t pay every person, every second. That’s a constraint of the existing financial system and we build our products around those constraints. But this is going to change with the micro-transaction capacities of the blockchain.

When economic activity is moved to a blockchain, tokenized and servitized we can then begin to actually track the real flow of value exchanges and match those with token exchanges. Instead of buying a song you stream it and pay in tokens for what you stream. Instead of paying a flat rate road tax you pay as you drive, or instead of paying a fixed insurance rate you pay your insurance as you drive, etc.

GLOBAL SYSTEM

Digital communication networks are the backbone of the network society, as the electrical power networks were the infrastructure on which the industrial society was built.

Furthermore, because the network society is based on networks, and communication networks transcend boundaries, the network economy is global, it is based on global networks.

By reducing the border around centralized organizations blockchain networks morph into ever-larger systems as they provide the underlying infrastructure for the evolution of a new level of economic organization on a global level.

These token economies can be at once local, in that they enable anyone to set up their own micro exchanges of value, but also inherently global. These networks – because they’re living in this global computer network rather than inside of a specific cluster of servers somewhere – have a certain magical property, which is that they’re global by default, they’re everywhere from the day that you release them and the services are universally available. This is quite interesting because it changes delivery at the edges of the network. Currently, we are not very good at delivering services beyond the two billion richest people on earth.

The fact that these networks are inherently global, the fact that all the logic is kind of buried in the payments architecture, the fact that there’s no real recognition or international borders in these systems, because they all operate embedded in the internet, they don’t see the world as a set of countries they just see as an enormous global network, all of those things point to the possibility, currently quite far off, that we are beginning to see global service architectures that run on these systems. Not just the payments which we already have and are being used very successfully in a lot of poorer countries but also the possibility that the services which are built on top of those payments will turn out also to be global by default, which could have a huge democratizing effect on the global economy.

TOKEN MARKET SYSTEM

Openness is one of the key design features of blockchain networks, they are inherently designed to enable intra-organizational collaboration. As soon as you start to use a blockchain to support a closed organization, you start to find that there is no real reason to use a distributed ledger at all and that it is better just to use a centralized authority to maintain the database.

With closed centralized institutions the drive is to concentrate the most efficient resources in the center. Indeed the most valuable and effective centralized organizations are the ones that can concentrate the most efficient nodes in the center and exclude those that are less efficient.

Distributed networks, however, have a very different dynamic. Quite the opposite, they create the most amount of value by going outwards towards the edges to harness the resources of the mass of people within user-generated systems of exchange.

These open user-generated systems are what we would call markets.

One of the most effective ways to understand this shift into a token market economy is through looking at transaction costs, as it is the reduction in transaction cost and the increase in automated coordination that is now enabling us to convert centralized organizations into open networks. By automating transactions, automating compliance and trust and connecting people peer-to-peer, blockchain systems will radically reduce the friction within economic networks of exchange and make markets a primary mode of organization.

Markets can enable the decentralized coordination of large and complex organizations. One of the basic features of complex systems that we see in the world around us is that complex organization can, in fact, be the product of simple rules.

Markets engender this principle. Actors in markets can operate based only on very simple local information, if someone will pay me more for this car than it is worth to me, then I will sell it. If I get paid more at one job than another and I like the job then I will do it. The rules under which actors operate within an economy are often very simple, but through all the interactions we can get complex emergent behavior on the macro level without that organization being pre-specified.

Blockchain networks enable the shift in organization from formal structures to much more fluid structures based on value exchange via markets and those markets are organized through price signaling that alter people’s local incentives.

PRICE SIGNALING

Prices are the signals that coordinate economic activity via markets. A price is a signal wrapped up in an incentive. An increase in the price of oil signals users that oil has become more valuable in alternative use. But we don’t just want to signal to people we also want them to move in the right direction, to take the signal seriously, to adjust in the right way. The higher price does exactly this. It gives users of oil an incentive to respond to the signal. They respond by using less, by substituting a lower cost alternative. Suppliers are also incentivized by the signal to invest more in exploration, to look for alternative sources, to build more etc.

The price system economizes on information. It’s able to allocate resources in a decentralized fashion using all of the information available, but without collecting all of that information, without having to transmit all of the information, because it makes use of the information in a decentralized fashion. It uses the information which is in people’s heads via the local choices they make in the market.

Markets are linked. They are linked geographically across the world. They are linked across different goods. They’re also linked, through time. The market acts like a giant computer that arranges our limited resources over space, time, and across different goods so that we can allocate resources via a decentralized mechanism.

For example, after a hurricane, it’s quite common for the price of generators and chainsaws to become very expensive. It’s signaling that we need more of those resources. The higher prices in a hurricane-devastated region, that says, “Bring the resources here!” The high price is a signal saying that the value of generators, the value of chainsaws — it’s really high in this location, at this time. And that higher price is acting as an incentive. It’s telling entrepreneurs, “You can profit by bringing resources from where they have low value to where they have high value.” The price system is doing exactly its right job. It’s signaling and incentivizing people to respond to these shortages.

Jason Potts an economies at RMIT University describes well how tokens work similar to the pricing system. “The purpose of the token system is to publicly coordinate private actions and that’s the interesting part of this. It’s not a monetary system it’s not a price system per se but it’s still a system where you’ve got coordination going on where individuals are able to look at the tokens what they’re doing, the tokens are doing the coordinating, and adjust their behavior with respect to that and what you get then is emergent order. That emergent order is an economy, the proper word for it is catallaxy, not an economy. But the tokens are doing the coordinating and they’re not doing it because of their exchange value or they use value or the store value, value they’re doing it because of their coordination value… anything that can do that, use rules that can create private coordination using a public signal is an economy.

In this respect the best way to understand money and currencies is as “current” “sees” that is to say tokens allow us to see currents within the network. Jason goes on to note that “what [tokens are] about to open up is a whole new world of coordinating signals that didn’t exist before, that’s the big thing, that’s the game changer that we’ve never seen before” we are going to get a much more refined pricing system with all these tokens and automated exchanges “that means we can coordinate an economy so much better with all this new coordinating information which requires a token.”

LONG TAIL

This reduction in transaction costs that will be enabled by distributed blockchain networks will have a systemic nonlinear effect. It is not like simply altering one component or one section of the system, it will alter many exchanges within the economy, that kind of nonlinear systemic change can give exponential improvements.

Transaction costs are fundamental to wealth creation and economic well-being. Interestingly reducing transaction costs across an economy by just a small percentage can massively increase the wealth creation in that country.

The result of that lowering of transaction cost means that it will be easier to access resources out on the edges of the network.

What decentralization and the reduction in friction does is to enable access to resources out on the very edges of the network.

By shifting from closed organizations to open decentralized markets we have the opportunity to really build global networks that begin to include those right out on the edges.

Today, about two billion worldwide remain unbanked. In Asia 60 percent of the people are cut off from the world economy, they do not have bank accounts, they don’t have access to the financial system. In South America, it is 65 percent and in Africa, it’s 80 percent. The majority of the world’s population is cut off from the world economy. In most cases, they can only use cash which means they can only deal with the people that they see face to face, it’s a very small community of economic trade.

The average sub-Saharan African makes about 550 dollars a year. It is simply not financially feasible to expand a traditional banking system into remote countries that are sparsely populated with individuals that make only a little income.

The marginal cost of adding an account at that level with a protocol and open source community is marginally close to zero, so if we are able to build this decentralized economic infrastructure that is where the value will be, out on the edges of the network.

There are 4 billion under and unbanked individuals in the world and that is huge global growth potential.

With blockchain base token economies we are not just expanding what value types get incorporated into the economy but also by reducing transaction cost we are extending markets further out.

By converting centralized organizations with boundaries and borders into open networks we are making the networks of the global economy accessible to many more people.

These token networks are going to be incredibly global like we have never experienced before.

The infrastructure does not reside on a centralized server in silicon valley, but on computers around the world.

We can create protocols as peer networks that reside on a distributed computer network and simply provide the coordination mechanisms through which people interact without anyone necessarily owning or really controlling that system, thus reducing borders to entry and expanding markets to almost everywhere.

USER GENERATED ECOSYSTEMS

As we have previously talked about the central aim in the development of an enterprise or economy is linking the individual’s interests with the whole organization in order to achieve optimal overall outcomes.

In very small communities it may not be very difficult to maintain that connection. In small communities, people can see that their efforts contribute directly to the overall value created and the overall value created is in turn linked back to the benefits that they will gain.

Likewise, there is limited need for centralized coordination. Thus no great concentration of wealth in the system and people may feel that it is fair.

The problem with this model is that it doesn’t scale and allow for more complex economic systems with specialization of work. As a consequence, over time larger more complex organizations come to subsume these smaller more basic forms.

If you want really good scientists, builders or teachers they are going to have to specialize in those activities, which will, in turn, require large systems of exchange.

We invented formal centralized institutions, monetary systems, large market exchanges so as to achieve specialization, mass production, and complex economic organizations.

However, as we did scale, there came to form a disconnect between the individual’s contribution and the value to the whole. Which creates the potential for both negative externalities, large concentrations of wealth, extraction and inequality.

As the scale of the economic systems that we are engaged in has increased, the interconnectivity and interdependence between any two random members has decreased – because they are farther apart in the network. This has worked to disintegrate traditional cooperative institutions that are based on local interactions and interdependencies. In the absence of tools for interconnecting everyone within a large national society, we have had to create the large bureaucratic centralized institutions of today.

But these centralized institutions have created notorious divides within the modern capitalist system, between owners and workers, between producers and consumers.

With the rise of information technology and globalization, we are creating organizations that span the entire planet, creating massive divides between producers, owners, and consumers, with the interests and incentives becoming increasingly misaligned.

Clothes are produced in Bangladesh by people who get paid half nothing. Revenue is sucked up into a global financial system to pay shareholders. While end users have no loyalty or care for the organization from which they buy their products.

There is a massive misalignment of incentives that creates a hugely inefficient overall system.

MISALIGNMENT OF INTERESTS

We can analyze the incentives structures of this organization by looking at the centralized technology platforms of today. Here we see on one side we have value creators and the other side we have value consumers, they’re all coming together through some type of central server platform.

For example, with Uber you would have the value creators on one side, being the drivers, sending their information to a central server and on the other side you’d have the riders that are using the transport service from the platform. In the middle you have the platform and of course the reason that these companies are doing it is for-profit. So a portion of the profit or all the profit goes up to shareholders.

The users of the system do not care if the value of Uber goes up or down, all they care about is getting from point A to point B. That is their involvement with the organization and that’s the limited vested interest that this centralized structure is able to take advantage of.

The drivers likewise don’t care about the value of the overall organization, they just want to get paid and the shareholders and management are only interested in the quality of the service and the conditions of the workers to the extent that it affects the profits of the organization.

Likewise, we can look at Facebook and see that it is at odds with its users. Facebook’s founders and shareholders have made massive amounts of money.

Yet its users didn’t, despite contributing the key personal information and content that is the central value proposition of Facebook.

Profits are drawn inwards and upwards to the top management and shareholders. With its billions of users and high engagement, Facebook has become enormously powerful in our world. Yet it’s controlled by a small handful of people. This is dangerous for society. Especially given the fact that it is not really structured to handle such
responsibilities.

The only reason that these companies or shareholders are putting forth the products is for the money that they can make and that is the entire business plan. It is to maximize profits and that drives our whole economy.

What you have here is a split between the users and the beneficiaries rights and that creates a huge degree of misaligned interest. Not only this, but there is no user vested interest, the users don’t really care about the success of the company in which they’re using that product. That really leaves a lot of value on the table, because the user’s engagement can be hugely beneficial.

TOKEN SYSTEM

Token economics offers the potential to reintegrate this whole system. Break down divides between users and producers, between workers and owners; working to align their incentives within a whole ecosystem.

By connecting people peer-to-peer and automating the operations of the network, blockchain technology enables us to take out the centralized component and reintegrate producers and consumers into a much more functional ecosystem of exchange.

As illustration, we can think of the production of a movie. Currently, this is achieved through a centralized organization for-profit that then hires producers, directors, and actors to make the film which people then pay to see with profit going to the investors.

But this could be turn into a token network. We use a blockchain network to create a token, call it a “movie coin.” Actors, directors, and others get paid in that coin that viewers have to buy in order to see the film. People can purchase the token before production to raise the initial capital to fund the project, thus cutting out the intermediaries.

As another illustration, we can think about the fact that the average tenure of an employee in Silicon Valley is less than two years. One of the causes is the lack of alignment between employees and the owners. This is called the Principal-Agent Problem. Every group of people has principles, which are the owners, and agents, which are the employees, and it is easy for them to become misaligned. What may be good for the employee may not be good for the company.

In startups, principals and agents are the same. That’s why they are all really motivated to work together and can create a great amount of progress rapidly. But as the organization grows there becomes a growing gap between owners and employees and growing potential for the misalignment of their interests.

By creating micro-economies we can work to reintegrate the two. Distributed organizations have no centralized management structures for controlling and coordinating the organization. The architecture of the code is the rules of the organization and people may have an input on how that code is altered. The aim is to have autonomous actors who feel integrated with the organization to create true user engagement. By functioning as both equity and currency the token can work to link the value of the ecosystem with the value that people exchange within that market.

Moving to decentralized ecosystems you really have the same parties involved but, you removed the centralized entity completely, thus closing the economic loop of that company with a peer-to-peer token exchange. Instead of sending money to a centralized body with fixed fees on both sides taking off a profit margin, these companies can introduce a token.

Because of the linkage between the value of the exchange token and the value of the network, in the token system, the value generated gravitates not upwards within the hierarchy but naturally propagates to the token layer that reflects the value of the whole ecosystem and goes into the pockets of anyone holding the token.

Because it is also a utility token it means that the value goes to those using the network, the producers and end-users.

In the example of Uber, imagine every single user paid in a native currency or a native token of the actual organization itself and then every driver receives that token and then they sell it back to people that need to have rides. This closes the economic loop and aligns the interests of everybody in the organization. You now have unprecedented vested interest, every single person involved in that corporate ecosystem is now invested in the success of the organization.

Just as everyone holding a Bitcoin will promote the digital currency to their friends, anyone holding the token of any network will be incentivized to promote the use of that network, so you are turning the users into evangelists.

Another example would be Brave. Brave is a new token network for the digital advertising industry. It pays publishers for their content and users for their attention. This service creates a transparent and efficient Blockchain-based digital advertising market relative to the traditional model.

An Ethereum based network that radically improves the efficiency of digital advertising by creating a new token that can be exchanged between publishers, advertisers, and users. By connecting all parties involved directly via a token market, publishers receive more revenue because middlemen and fraud are reduced. Users, who opt-in, receive fewer but better-targeted ads that are less prone to malware. At the same time, advertisers get better data on their spending and more engaged users.

What we start to get are economic networks that are really like a cross between private enterprise and public utility. We are getting a hybrid of the community system with its vested interests, where the work you produce is connected to the value of the ecosystem, but also getting the option to exchange within broader systems involving high levels of specialization and complex coordination.

MECHANISM DESIGN

Token economics represents the merging of economics and information technology. It shifts economics into a more technical realm.

In the past, we could really just tweak around the edges. But now we can really design economies like we never could before.

Once we shift business and economic organization into this more formal and technical realm, we can begin to bring very powerful mathematics and analytical tools to bear on what we are doing.

One aspect of this is using the models from game theory to design these incentive systems.

Game theory is the study of the strategic interaction between adaptive agents and the dynamics of cooperation and competition that emerge out of this.

A much more recent extension of this is mechanism design. Mechanism design is a field in economics and game theory that takes an engineering approach to designing economic incentives toward desired objectives, in strategic settings. Because it starts at the end of the game, then goes backward, it is also called reverse game theory. It has broad applications in the management of markets, auctions, voting procedures and is of particular relevance to token economics.

As an economic theory that seeks to determine the situations in which a particular strategy or mechanism will work efficiently – compared to situations in which the same strategy will not work as effectively – mechanism design theory allows economists to analyze and compare the way in which markets or institutions lead to certain outcomes, because of their inherent incentive structures.

With mechanism design, we are trying to design the system towards a certain desired equilibrium state. With this approach we first think about what outcome we would like to see from the system. We can then build a set of rules that will hopefully lead to those optimal outcomes.

Legal systems are a kind of mechanism, as they are a method for shaping human behavior. A particular set of laws is usually trying to shape a particular type of outcome through the imposition of a set of penalties, fines, rewards or incentives such as tax breaks, etc.

Of course, these existing systems are centralized in their design, but with token networks, we are looking for a mechanism design that does not depend upon
a centralized authority specifying and enforcing the rules, but instead some kind of peer-to-peer value exchange mechanism that is self-regulating through direct information feedback loops.

FEEDBACK SYSTEMS

As previously mentioned coordination within distributed systems, like token economies, is not achieved via centralized coordination, but instead by the interaction between members and the incentive structures created by the exchange of tokens. The primary dynamic for us to consider then is that of the feedback loops that are created out of people interacting peer-to-peer. We are trying to enable cooperative structures without imposing them and that is achieved through peer-to-peer interaction.

Creating optimal outcomes for the whole system means effectively linking the payoffs of the individual to those of the whole system and thus reducing negative externalities.

Every action that an agent takes has an effect and we can ask what are the repercussions of those actions and who bears the costs and benefits. When an actor gains from an action but the costs are born by others this is a negative externality.

Pollution is the classic example of a negative externality. So too, excessive inequality may be seen as a negative externality of people’s greed.

Negative externalities incentivize actors to overperform a given action as they are not bearing the cost and leads to unsustainable results overtime, as that cost is being born by someone else, the whole system or environment.

Building systems of cooperation in such a context means enabling ongoing interaction, with identifiable others. With some knowledge of previous behavior, lists of reputations that are durable and searchable and accessible, feedback mechanisms, transparency etc.

The development of current web platforms is good illustration of where we are going as they often incorporate many of these design components.

Sites like TripAdvisor and Yelp exist as standalone feedback platforms, while Amazon and eBay legitimize their products by allowing users to place feedback on their purchases.

Feedback systems are used to rate and rank content on social media like Reddit and Facebook.

All of the above have become an essential part of how we identify quality products and services that meet our needs.

But while the internet gives a voice to all, misinformation has become an accepted reality. Competitors may falsify reviews to discredit a product, while the review platforms themselves may modify or delete feedback that doesn’t fit their agenda.

The combination of blockchain tech and advanced analytics could take the possibility of bias and corruption out of current feedback systems, with an end-to-end process designed to pick out quality feedback and then safeguard it.

Revain is one blockchain platform that works to secure feedback systems. All incoming reviews will have to pass an initial screening test, with IBM’s Watson AI platform analyzing emotional and unconstructive language. Users are rewarded with RVN tokens for submitting a review, while companies can use the token to purchase quality feedback, direct from its customer base. And at the end of the whole journey, consumers have access to transparent, high-quality feedback to aid their decision-making.

Uber is an example of mechanism design. From this perspective, Uber just adds to the financial contract of paying someone to take you somewhere a reputation feedback system.

Uber adds reputation for both drivers and for riders and adding reputation into the system actually significantly influences the way that people behave within that system.

The goal is to shape the behavior of the participants and adding that additional reputation can have a significant impact.

But of course with blockchain systems, this can all be tokenized, and because tokens can represent any form of value exchange – natural capital, social capital, cultural capital, industrial capital etc. – we can build in many different forms of feedback loops and different forms of mechanism design.

TOKEN INCENTIVE SYSTEMS

Incentives are a central part of economics and blockchain networks give us new ways to design and build incentive systems.

As Mike Goldin, a lead engineer at ConsenSys noted “Blockchain gives us programmable money. When you can program money, you can program incentives, and when you can program incentives you can program people.”

Programming people may sound a bit funny but in fact, it captures something of what is now possible. Like never before we have the capacity to rapidly build and implement large-scale structures for incentivizing human behavior towards certain ends.

We are increasingly moving into a world where we can analyze, design and adjust real-world economic and social outcomes by deploying new protocols on the internet. This is a new capacity that we now have, one that offers both huge potential and is at the same time frighteningly powerful.

How to create incentive systems that align the interest of the individual with the overall beneficial outcomes for the organization or economy, is a central issue of interest in business management and economics in general.

A central premise of economics is that people respond to incentives.

One of the key insights of Adam Smith was that overall beneficial outcomes for society and economy should not depend upon the virtues of the individuals within the system but instead, optimal outcome should be achieved by designing incentive structures that link the individual’s self-interest with beneficial overall outcomes.

This is captured in his famous passage “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.”

This is a very important insight and history will teach us time and time again that we should not depend upon the virtues of the agents within the system, if we wish for long-term stable functional outcomes. Over time the most virtuous of leaders can turn into the most brutal of dictators.

The only way we can assure long-term stable outcomes is by a clear analysis and design of the incentive structures in the system. The only way we are ever going to get really functional economic systems is by really understanding the incentive structures in the network and designing those so that they are aligned with the overall desired outcomes.

Every misalignment of incentives will over time turn into a dysfunctionality within the network.

The structure of the incentives within the system is critical to whether the economic system will thrive or fail. Capitalism has succeeded to a certain extent where communism failed precisely because of its incentive structure.

A good illustration of this is The Jamestown Colony, the first English-speaking colony in North America founded in 1607 in Virginia. The colonists spent the first 10 years of their existence hungry, they never had enough food, with over 80-percent of the colonists perishing in what became known as the “Starving Time”.

But then after those first ten years, the colony thrived, the colonists had plenty of food and their numbers increased and it took off. It was the same people using exactly the same techniques so what changed. Before 1615 they all went out to the field they all worked and then they took the output from that field and divided it up equally. In such a system people have no incentive to work harder than the minimum required; there was no linkage between individual incentives and overall beneficial outcomes. In 1615 they made a very simple change to the rules, they divided up the farmland so that each person had their own individual plot of land. You could now do whatever you wanted with the food that you grew, they grew their own food, they ate it, they sold it to each other, they gave it to their families and the colonies thrived.

It was a change in incentives that ended the starvation and brought about abundant food supplies.

Human beings have always been bad with incentives getting ourselves into all sorts of situations we don’t intend to because of how we try to direct the ways that groups behave.

We can look a what the incentive structure that a deregulated financial system has caused, or anonymous political donations of money. The reality of how incentive systems play out in the world is complex and typically beyond the designer of the system’s capacity to foresee. As a consequence we often just lurch from one model to the next as we react to the unintended consequences of the previous system.

The central aim of economies is to enable people to work together within a combined enterprise. To do this we have to align the behavior of the individual with the whole.

Blockchain networks are all about protocols that enable coordination between actors. The great innovation of blockchain networks is as a new system for incentivizing a network of autonomous nodes towards maintaining a shared infrastructure.

Token economics builds upon this underlying technological innovation. With tokenization, we are going to start to incorporate explicit incentive systems into more and more spheres of life. We are attempting to build these micro-economies around every source of value so as to align people’s individual incentives with delivering an overall functional ecosystem.

TRUST EQUILIBRIUM

In every socio-economic organization, there is the opportunity for collaboration and cooperation which leads to optimal outcomes for all and there is the opportunity for competition and conflict that will lead to suboptimal overall outcomes and unequal pay-offs for actors. The point of a social or economic institution is to achieve coordination and optimal overall outcomes.

Every game has two equilibria. There’s a good equilibrium where everybody cooperates resulting in everybody gaining and there’s a bad equilibrium when nobody cooperates, nobody gives in and nobody gets anything. The optimal overall equilibrium is typically very fragile. It’s enough for one person to deviate from the good strategy and the whole system can deteriorate. The bad equilibrium though is very stable. Trust is about our ability to stay in the good equilibria, what do we do to live in a society where we all benefit because everybody has a short-term incentive to betray the public good. But the moment people start betraying the public good things deteriorate quickly?

The traditional way that we have solved this equation is through a centralized authority that mandated that all act according to the economically or socially beneficial outcome. Token economics attempts to achieve this alignment through peer-to-peer exchanges of value that incentivizes the actors to operate according to overall effective outcomes.

To illustrate this dynamic we can think of the torrent file sharing system. In a torrent network, anyone can share their files with a decentralized group of peers. The idea was that people would download them and keep sharing the file with the network for others to download. If you were downloading a file, then you were expected to seed as well. This is what we would call an honor system, which is a system operating based on honor or honesty without having strictly enforced rules governing its principles.

The problem is that humans are not always the most honorable of creatures and without any economic incentives it made no sense for people to keep seeding a file which took up unnecessary storage space and bandwidth.

What token economics adds is the capacity to incentivize these peer networks. Unlike open source software, peer-to-peer file sharing or creative commons where the infrastructure is dependent upon the goodwill of the actors, tokens incentivize the peers to participate. So instead of a file storage system being dependent upon a centralized for-profit organization or people’s charitable willingness to provide the resource, it gives those members tokens to incentivize their provisioning of the resource.

The fact that tokens can be used to define and exchange any form of value means that these distributed organizations can be used to deliver all forms of services; both what has been previously delivered by private organizations but also services that have previously been the purview of the public sector.

Public services like cleaning up litter, maintaining parks, public security, care for the elderly, reduction in noise pollution, civic engagement etc. Indeed anywhere value could be generated by the coordination of members, we can define a token for that value and use it to incentivize the agents towards the coordinated behavior, thus enabling the delivery of the service through peer-to-peer token markets.

The Ethereum developer, Karl Floersch, summarizes the current situation well when he notes: “Incentives drive behavior and open access to programmable incentives sets the stage for radical change. This is a really unique moment in history, this change can be good or this change can be bad, we can program incentives which promote cooperation and equitability and general happiness, everyone’s goal, or we can create incentives which prop up a few people and give them way more power than they already have. This is like kind of terrifying, so we need to design mechanisms, test them in the real world and share our findings and do that over and over on a large scale.”

DECENTRALIZED TOKEN ORGANIZATION

Token economies can be understood as a new way of coordinating human activity in a decentralized fashion, this being done through peer-exchanges within market networks.

As Primavera De Filippi of Harvard puts it, “Today the blockchain is marking the beginning of a new digital revolution, whose focus is not just human communication but rather human interaction and cooperation. What the internet has done to achieve global interpersonal communication the blockchain could do today to achieve global and systematic collaboration.”

It is common to compare the invention of Bitcoin and the blockchain with the internet. In this respect, it is often said that the blockchain is Internet 2.0 The internet has been a powerful tool that has revolutionized the way we interact. But if anything this comparison undersells the significance of the blockchain. As the authors of a recent article on “The Blockchain Economy” suggested, a better metaphor for the blockchain is the invention of mechanical time. Before the modern mechanized measuring of time, human activity was temporally organized by natural cycles: the crow of the rooster in the morning, the gradual descent into darkness at night. The problem with this though was variability, there was simply too much variance in the measurement of time for it to function as a widespread system for synchronizing economic activities.

Mechanical time opened up entirely new categories of economic organisation that had until then been almost unimagined.

During the industrial revolution, the effect of the reduction in the variability of time measurement was felt in almost all areas. Mechanical time allowed trade and exchange to be synchronised across great distances. It allowed for production and transport to be coordinated. It allowed for the day to be structured, for work to be compensated according to the amount of time worked — and for workers to know that they were being compensated fairly. Working life became routinized around this new objective standard of time measurement.

The blockchain and token economics may well be such a systemic transformation in human coordination.

DECENTRALIZED COORDINATION

The blockchain is a new coordination technology that relies on a decentralized network of computers in order to coordinate individual actions in a decentralized manner.

We can think of token economies as a way for people to mimic the social dynamics found in certain highly social creatures like bees, ants, and termites as a way to promote and ideally achieve effective collective organization.

By recording individual actions on a distributed database the blockchain makes it possible for people to coordinate themselves indirectly and collaborate on a global scale, without any centralized authority or hierarchical structure. This is something quite new in human civilization. Until very recently the basic premise has been that order and organization are achieved by centralized authority.

CENTRALIZED INSTITUTIONS

Throughout history, we have achieved widespread coordination and economic organization via centralized systems that imposed common standards. The evolution of civilization can be understood as the rise and fall of ever larger more complex systems of human organization.

Economies are built around networks of trust and common protocols. Traditionally these have come from either a government institution or from some form of Church which are structured in a pyramid form.

In those power structures, you’re able to do business, you’re able to trust people who are not your immediate family because the centralized authority provides the common standards, the protocols, the regulatory and legal structures for you to trust each other and exchange; fiat currencies being one good example of that.

Although centralized systems have their advantages they also have their disadvantages and are inherently limited when it comes to the formation of very complex organizations.

ALIGNMENT OF INTERESTS

One of the primary issues with current centralized organizations is that they are not general purpose as each organization acting as an authority also has its own vested interests. This creates a misalignment of incentives between the centralized authority and users of the system. If we are lucky and we get virtuous members in the center of the organization the interests of the centralized authority may be aligned with those of the network, but equally, they may not.

As we will discuss in the coming module, there is really a misalignment of interests at the heart of centralized organizations.

We have this problem today where most of our most important economic and financial functions are provided by centralized for-profit organizations. The incentive of the organization is to create profit for its owners. The result of this can be that profit gets sucked into the center and upwards, reducing the quality of the network delivering the function and accentuation inequality.

BOTTLE NECKS

Likewise, centralized coordination creates bottlenecks. Resources are brought into the center, processed and then pushed back out to the edges. The system always works much better close to the center and then coordination drops off the further out you go.

This is why, for example, Zimbabwe is a much better use case for cryptocurrencies than say Singapore, because Singapore is close to the center of the global financial systems while Zimbabwe is out on the edges.

Centralized systems have problems delivering structure and functionality all the way out to the edge of the network. The result is that we end up with a trickle-down economy with the edges always being dependent upon the center, but the center not being properly incentivized to deliver services all the way to the edges. Those at the center get a good service but those at the edges don’t. The billions of people who are left out of the global financial system because they are not economically worth serving is illustration of this.

FRACTURED SYSTEM

Centralized systems end up forming either monopolies or a fractured overall system.

Centralized systems have a specific locus as their center and then push out until they meet another organization. The end result, is either a monopoly where one comes to dominate overall others or a fractured system, with lots of different patterns forming. The nation-state is a good example of this. Within a given jurisdiction we have a monopoly of public services but on the global level, we remain with a fractured system.

PEER-PRODUCTION

The alternative to these centralized systems is decentralized peer-to-peer networks. Without centralized authority being used to achieve coordination, this coordination is achieved via direct exchanges of information and value peer-to-peer, such as in a pure market, where the price is decided by the interaction between members.

Token economics turns these centralized institutions of the industrial age into distributed token markets. The critical change that is coming about is that we are now able to design token systems that work to incentivize people’s behavior towards coordinated outcomes, without that coordination being imposed by some centralized authority.

What is different now is that we have the technological means that we can design economies instead of just organizations. Economies that create the right incentive systems and feedback loops to coordinate the activities of the organization in a decentralized fashion.

Token economies build upon the development of peer-production, an alternative model to economic activity that has arisen with the development of the internet.

Peer-production is a process taking advantage of new collaborative possibilities afforded by the internet and has become a significant mode for the division of labor within post-industrial economies.

Free and open source software and open source hardware are two examples of peer-production.

With the development of web 2.0 technology, it became possible to coordinate a large number of people using software systems as the coordination mechanism instead of any centralized authority. This was exemplified by projects like Wikipedia.

But these networks were lacking the critical element of economic incentive. Token economics provides a new way to fund and incentivize these newly formed distributed networks.

Juan Benet, founder of Protocol Labs, describes well what is happening today, “One of the interesting properties here is the ability to create markets where there wasn’t a market before… what [blockchain] application platforms can do is suddenly cut out this huge middleman with a protocol and that is a massive cost-saving for the entire network… you can turn this into a protocol that will optimize the entire process much faster than any centralized company can do, because it turns it into a market. The moment you can take a very complicated process and translate it into a market where a whole bunch of different actors can vie for opportunities and just beat each other, you have this amazing optimization power, where it will just fit the function much better than a centralized entity could have.”

The blockchain provides the infrastructure of trust, secure record keeping and peer interaction required to create general purpose networks for the provisioning of economic and financial services via distributed markets.

The challenge of doing this though is one of designing incentive systems and this is what we will talk about in the coming module.

BLOCKCHAIN PHYSICAL ASSETS

The blockchain originates out of the purely digital realm of Bitcoin. Thus blockchain networks themselves can only ever manage what is on the network. This is fine if the asset is simply a digital token. But going forwards we find ourselves increasingly wanting to use these networks to manage real-world assets. Thus these value networks will have to interface with the real economy and this interface between the physical and information realms creates major issues.

Economies are, at the end of the day, still very much physical systems of technology, land, natural resources, buildings etc. if we are serious about migrating our economic systems to the blockchain, major consideration has to be given to that interface to ensure that the tokens are securely and accurately connected to their underlying physical assets.

In a digital system like Bitcoin, there is always consistency. Transactions obey the rules of the software and there are no exceptions.

In the real world, there are often exceptions. Cars are stolen, houses destroyed, videos turn out not to be properly licensed, commodities fail to be delivered. Humans sometimes don’t obey the rules. Therefore the key challenge for any system that involves tokenizing real-world assets, is to ensure that the digital token stays linked to the real-world asset.

Very few people in the blockchain world have an appreciation for the complexities of the physical systems that run our economies and their regulation; such as containers passing through customs at a port.

There is a huge gap between this very light dematerialized culture of the blockchain and the very heavy culture of traditional physical assets and the national legal structures that they are embedded within.

Today this interface is secured by laws and ultimately the physical force of a government that backs those laws. If you have a legal document that says a piece of land is yours and someone comes and resides on it you can go to the government and they will physically remove that person from your property if need be.

Imagine a token that represents a fractional interest in a set of gold bars in a vault. If a gold bar is taken from the vault, how will that be reflected in the digital token? Who will make sure that the token value stays linked to the gold bars that should be in the safe? Who will bear the risk and how? If the buyer of a token can’t be sure that the token is properly linked to the real-world asset, then the value of the token will fall or even become zero if no one has faith in the correspondence between the two.

ARBITRATION

At present blockchain systems are still dependent upon traditional legal frameworks for this linkage between the digital representation of an asset and the asset itself.

Currently, arbitration is seen as one of the most effective ways of mapping between what is happening on the blockchain and what is happening with the physical asset and the legal systems it might be embedded within. Arbitration is a long since used method for creating legal agreements in international commerce where both parties agree to bind themselves into a legal contract of their making.

An arbitration award is legally binding on both sides and enforceable in the court of choice.

One way of linking legal systems to what is happening on a token network is through what is called a Ricardian Contract. A Ricardian contract places the essential elements of a legal agreement in a format that can be expressed and executed in software. The aim is to make the document both machine-readable and readable as an ordinary text document, such that lawyers and consenting parties may read the essentials of the contract conveniently.

From a legal perspective, the use of markup language embedded within a largely legal prose document leads to reduced transaction costs, faster dispute resolution, enhanced transparency and improved enforceability. From a computing perspective, the Ricardian contract is a software design pattern to digitize documents and have them executed within financial transactions, such as payments, without losing any of the richness of the contracting tradition.

It is robust through use of identification by cryptographic hash function, transparent through use of readable text for legal prose and efficient through markup language to extract essential information.

Mattereum is one such project that tries to use Ricardian contracts to create an effective linkage between records on the blockchain and the established off-chain legally binding dispute resolution of arbitration thus giving what happens on the blockchain full legal weight under natural language contract.

Mattereum is the first, what it calls “Internet of Agreements” infrastructure project for legally-enforceable smart contracts, enabling the sale and lease of physical property and other transfers of rights in assets. Mattereum is billed as a court that understands the nature of cryptocurrencies, making physical property and intellectual property transactable on a blockchain.

In a case where you might buy a physical asset using a fraction of a Bitcoin and the seller does not follow through, it is difficult to explain this to a judge in a small claims court. This is where Mattereum comes in, enabling technically competent arbitrators to make rulings in these cases instead of a judge. As the founder of the project, Vinay Gupta describes it “Mattereum.com is my bid to get the necessary legal frameworks in place to make direct control of physical property using the blockchain recognized in 150+ countries. I want to break the door open to the material world so you can change the status of a smart contract, and have a real-world court recognize that legal ownership of a fiat asset has changed hands. Fiddly, but it’s necessary infrastructure for all of our next steps together.”

TECHNOLOGY

The alternative to depending upon traditional centralized legal institutions is depending on technology. Code may be the law on the blockchain but outside of those networks, Big Data and IoT will be law.

Big Data is going to give us new insight into what happens when and where with high levels of statistical assurance. While at the same time IoT will put code into all of the technology around us that we are now so dependent upon and that is a new form of law enforcement. If you have the code that can stop a car or open a door lock then you control that system and can enforce whatever contract is on the blockchain.

As an illustration, we might think about a blockchain IoT securitization of gold. We create an automated warehouse, people are allocated secure sealed lots within the warehouse. We deposit a stock of gold in one area and when someone purchases a block of gold the system automatically moves it to the owner’s container and the owners gold token account is calculated by summing up the gold in their container. This is a simplified representation of a blockchain cyber-physical system where blockchain records and tokens are linked directly to the underlying asset through automated technology. By an extension of this model whole buildings, cars and other assets could be directly connected to blockchain tokens thus bridging the gap between the virtual token and the physical asset.

SECURITY TOKENS

The first application of blockchain technology may have been in currencies, but people are becoming increasingly aware that a secure distributed ledger system of this kind could in fact potentially support all economic activity one day.

Today startups around the world are feverishly building new frameworks for migrating ever more spheres of financial and economic activity to distributed ledger technology.

Many believe that the next stage in this process is the conversion of capital markets to token networks as it is becoming increasingly apparent that the management of securities of any kind, from stocks and bonds to real estate, could be brought into the age of information through tokenization.

There is currently great interest by financial intermediaries and technologists in figuring out how to move real-world assets onto blockchains to gain the advantages of distributed ledgers, while keeping the characteristics of the asset.

The conversion of capital markets to token networks would create many efficiencies. It could take the somewhat elite world of high finance and make it accessible to any and all. Creating new opportunities for investors and new sources of equity for organizations.

Our capital markets of various kinds today hold trillions of dollars of assets that are being used far from their potential. Locked up by high transaction costs, low transparency, layers of middlemen and bureaucracy.

The tokenization of this system could radically improve the efficiency of transaction processing by removing the layers of bureaucracy created by centralization. It could unlock vast amounts of currently locked up fix capital. It could create a quantum leap in transparency, opening up capital market data to advanced analytics in unimaginable new ways. Likewise distributed ledgers are tamper-proof making them less susceptible to fraud.

CAPITAL MARKETS

Our world is full of different forms of assets: oil, basic foodstuff, stocks, carbon credits, real estate, gold, etc. Many of these assets are difficult to subdivide or physically move around. So buyers and sellers instead trade pieces of paper that represent ownership of part or all of those assets.

However this existing system composed of paper and lengthy legal agreements is cumbersome. Assets are difficult to transfer and can be hard to track.

Tokenization of securities is the process of converting rights to an asset into a digital token on a blockchain.

Any asset that is currently traded on a capital market as a security, such as commodities, shares, bonds, or various forms of derivatives, could be tokenized by linking them to a blockchain register.

Indeed any asset at all could be securitized by linking it to a digital token. This might include any form of property, such as a house. It might include loans or mortgages, all of these could be converted into security tokens and traded on markets.

The most obvious use of this system is the raising of initial funding for a new project. Already huge amounts of funds have been diverted from traditional forms of venture capital in to directly funding projects through ICOs.

Many industry observers believe that mainstream companies will one-day issue shares through ICOs, either in place of or in addition to traditional public offerings.

ICOs are a good example of where we are heading as we shift more of capital markets onto the blockchain. They illustrate the capacity to open up these markets to the many, as venture capital has gone from the domain of a few investors, to being accessible to anyone on the planet with internet connection and a few dollars.

They illustrate the direct peer-to-peer nature of token economies. But what we have seen so far is really just the tip of the iceberg as what has happened to venture capitalism could literally happen to all of capitalism. As all capital could be tokenized. A number of platforms are currently in operation or being built to do exactly this.

TOKEN PLATFORMS

LAToken is one such platform. LAToken is an asset tokenization platform that allows users to convert tangible assets, such as real estate or precious artworks, into tokens, thereby making them sellable in fractions. You can tokenize your asset on their platform and sell it in fractions to investors. Investors may then sell the tokens on a secondary market and you can buy back the asset later on, or sell it on the settlement date.

Imagine an artwork by a famous artist with 100 copies. The art prints could be tokenized by having ownership held by a company that has a standing offer to the public to redeem tokens for either a single art print or a fraction of one copy. In this way, buyers could obtain an easy-to-transfer token and a secondary market could transact in fractions of the art prints.

This could potentially be a source of financing for the artist and a way for the broader public to participate in the art market that is currently inaccessible to most.

Likewise, commodities could be converted into security tokens and traded.

Imagine a group of companies that want to trade aluminum with one another. Normally they’d exchange paperwork and keep their own lists of trades. If they could move to a blockchain-based system for trading their aluminum, they could potentially reduce paperwork and have more robust record-keeping.

SELF-SECURITIZATION

One of the fascinating aspects of distributed ledger networks is that they can enable people to securitize their own assets.

Tokenization is an extension of the more traditional process of securitization, which is the conversion of an illiquid asset into a record that can be traded to increase liquidity.

Whereas previously the creation of securities was the domain of large highly regulated centralized organizations, blockchain networks can automate this process and make it accessible to all. People and organizations of any kind could securitize any asset that they own. They simply lock it on the blockchain and receive liquidity in return, when the liquid capital is returned the illiquid asset is unfrozen.

Sweetbridge is one token platform that is essentially enabling people to be their own banks when it comes to loans. This is done through creating a blockchain network where people can register and lock up their own assets as collateral, against which they can borrow money at low-interest rates or even no interests rates at all.

Users are essentially lending themselves money without a credit check because they are lending it against their own assets they have locked up.

What is happening is that when you lock an asset into the network, the network grows in value and gives you the tokens equal to that growth in its value, which you can then exchange for other tokens of fiat currency. Because you are creating the currency and not renting it from somebody else you don’t need to pay much interest on it or even no interest at all.

Where this gets exciting is not in developed economies, it is in places where you have a highly ineffective and inefficient formal economic system and a high level of informality, such as the developing nations of Africa and Asia.

In these environments, interest rates tend to be very high and loans tend to be very difficult and yet these are the roots of the supply chains of the world. This is where the food is grown, where the minerals come from. In these frontier markets it can be really tough to get financing of any kind and if you do it’s very expensive. It may be 10 to 20 percent. With a security token platform like that of Sweetbridge, no credit rating would be needed. You just lock up some asset and get liquidity in return at a low-interest rate.

This can be revolutionary, making a massive difference, not just for global trade but in the lives of the most vulnerable.

REAL ESTATE

Real Estate is another asset class that is set to move to token networks in the coming years.

The stock of real estate assets is enormous, it is the biggest asset class in the world, valued at well over 200 trillion dollars.

At just 1.4 trillion in transactions every year, most of this market sits stagnant and does not really trade. Real estate is a very illiquid market and one of the least transparent. Buying and selling property especially on the global market across borders is full of frictions, middlemen, and lengthy procedures.

You can hold a piece of a corporate or a government debt in a bond, but it is very difficult to hold a piece of property and there is a lot of friction to trading property. While at the same time for many assets in real estate people will pay up to 20% more for one that is liquid versus one that is not. So tokenizing these assets could release huge amounts of untapped or underused resources.

Atlant is one platform that is working to tokenize real estate. It does this by linking the property to a special purpose vehicle (SPV) which is then converted into tokens. The property is purchased and transferred to the SPV. The SPV is split into many shares that can then be traded on the platform with almost no friction. Now a person sitting in Taiwan can at the click of a button invest in the creation of a new factory in Poland or a section of an office space in Mexico City.

Likewise, through this tokenization of property, the physical asset can be split up into extremely small units of equity, that make the whole market greatly more liquid. Say for example you have a shopping center, the platform can tokenize it by dividing it into a million centimeters of floor space. People can then exchange those small units or rent the property they own out.

PHYSICAL LINKAGE

In all of this conversation around the tokenization of real-world assets remains one big elephant in the room, which is the question of how exactly do you put assets on the blockchain?

The linkage between the information software layer of the blockchain network and the physical real-world asset is of course of critical significance and in many cases remains an unanswered question as to how exactly that linkage is secured. So in the next module we will pick up on this very topic.