Asset tokenization is a fundamentally new approach to doing business. It has a significant impact on various areas – real estate, energy, and companies operating in other industries. The token economy is already substantial and expected to keep developing. This article will explain what token economics is, what you need to know about it, and how it can affect your business.
What is the token economy?
Initially, the term “token economy” was used in applied psychology. It was understood as a particular system of incentives that forms the desired behavior. The essence of this method was that tokens reinforced such behavior. These tokens could be exchanged for a reward.
In the digital assets and cryptocurrencies era, the concept of “token economy” has changed. Now token economics is referred to as the study, development, and implementation of full-fledged economic systems based on digital assets or currencies. If we talk about cryptocurrency markets, this concept is implemented using digital assets as tokens, and the “desired behavior” system is implemented through smart contracts. After users perform a specific action, they receive the desired reward, and smart contracts guarantee their execution.
Asset tokenization is the transformation of some underlying assets into a unit of tokens. Information about this is recorded in the blockchain on which this token is created. The data stored on the blockchain cannot be deleted or changed. It guarantees the safety of information and significantly reduces the risk of fraud. Everything that has any economic value can be tokenized. For example, it could be:
- real estate;
- shares of companies and securities;
- commodity assets, etc.
With the wide range of assets that can be tokenized, many potential token economies are emerging accordingly.
It is important to know that the token is not a digital file. Distributed ledger technology is a public infrastructure that stores records of completed transactions. The system is decentralized; all information is not stored on one or more servers. Blockchain is supported by millions of devices around the world. Due to this, the blockchain cannot be broken down by a single hacker attack; such an attack will require a massive amount of resources.
In today’s Internet era, the dominant force is the so-called “platform economy”. Examples of such a platform economy are Google or social networks – Facebook, Instagram, etc. Platforms are built on top of the Internet in such a system. They act as the governing body of the service. Companies determine which features need to be developed, and customers are willing to pay for them by buying a subscription, content, etc.
Platform companies are driven primarily by profit. The attitude to users’ interests is indirect; it comes mainly from profit. The token-based economy works differently. Here user interests and appropriate incentives are at the forefront. This combination provides a continuous improvement in the functioning of the token economy.
Where does the token economy start?
The token economics always starts with a token issue for crypto fundraising. It can be an ICO, IEO, STO, or other types of initial offerings. Crypto fundraising allows the project team to carry out the initial emission of tokens. The demand for new tokens depends mainly on the vision of the project team and the sustainability of the token economy as a whole. As the value of a digital asset increases, new participants in the system are included in this economy. They buy tokens and increase demand for them. The supply of tokens is usually limited. Accordingly, if the need for digital assets grows, their value also increases.
An increase in the number of users strengthens the network. Firstly, it contributes to its decentralization, thereby maintaining the stability and security of the entire system. Adding more nodes has a positive effect on the strength of the blockchain. Secondly, each participant is working to improve the network and develop its services so that the system can attract more users. Participants will receive an appropriate reward, and new clients will bring new ideas. Accordingly, this increases the usefulness of the system. The more valuable the system, the more new users come. This strengthens the feedback loop. Generally, network tokens work like “shares” of the network. They can be used to manage the system; holders can get voting rights. Decentralization and majority decision-making prevent sabotage.
Why will the token economy grow?
Since 2019, the bitcoin blockchain has grown to 344 GB from 197 GB. In January 2021, there were over 4,000 different cryptocurrencies and over 350,000 token contracts on the Ethereum blockchain. Moreover, large organizations report plans to issue tokens and integrate them into existing services. Thus, the token-based economy is not only the economy of start-ups. The largest organizations from all over the world already participate in it.
Tokens can vastly improve the current economy. First of all, they can make transactions easier. For example, in ordinary financial settlements, transactions require considerable time and payment of rather large commissions. Blockchain allows you to confirm the authenticity of transactions, which reduces the likelihood of fraud and eliminates the need to develop a laborious audit system.
The asset tokenization and the issuance of security tokens play an important role in developing the token economy. Security tokens are digital liquid contracts or parts (shares) of some real asset with economic value. Any assets that can be bought or sold can be tokenized. Such tokens guarantee investors that their ownership share will remain on the blockchain. In addition, unlike other types of tokens, security tokens are recognized by many state regulators as securities. Accordingly, investors receive guarantees from official state bodies, and companies that issue security tokens must ensure that they comply with the law.
The token economy is an emerging field. It is only at the early stage of its existence, but at the same time, it has already passed a certain way. While it is still an imperfect area from a legal point of view, best practices are not yet well established. Some parts of the token-based economy will not be able to survive, but some will continue to develop and become part of the entire global economy. One thing we know for sure: tokenization has already changed many industries and will not disappear with time. Experts suggest that in a few years, almost all assets will be tokenized. If you want to enter the token economy and find out how tokenization is applicable for your business, we are waiting for you for a free consultation.