This piece has been featured in The Telegraph
As we draw toward the latter weeks of 2018, I find myself looking at how far we have come as a global community fixated by the promise of blockchain business models and of what tokenisation has and can deliver.
I am not a theorist. I find debate beyond a certain point banal. And as such, have found myself retreating from an unending pool of opinion on the future of blockchain technology. Even the technical purists have, themselves become theorists betting, arguing and investing on the future of where the technology will settle. This is a colossal waste on energy and its clogs up mental capacity for so many causing confusion and focus on things that really won’t matter 6 months out. The technology is evolving every day.
What is really profound and meaningful is to see how through blockchain, lives can be changed for the better. Set aside the jostling and turn down the volume on the ‘noise’ focusing on closed circuit incrementalistic projects (mostly trials in large institutions laced with political blocks to real disruption). What we should be inspired by how this technology has the power to turn economic and business models on their heads.
The potential of asset tokenisation:
Tokenisation of assets can have a huge economic development impact. Individuals, businesses and even whole economies can and will be affected by new financing models, greater market liquidity, broader market participation and consumer adoption and control. This will create the change in economic power bases on so many levels.
Tokenisation is immensely simple — the ability to capture information, value, ownership and conditional or legal construct via encrypted code. This information can all be collapsed into a single token housed via a transaction on a distributed ledger (DLT) or blockchain, eliminating the possibility of single point failures and unresponsive servers, where the data stored is immutable, complete, transparent.
One such area is the use of tokenisation to provide greater market liquidity to traditional asset classes and hence its impact, bit by bit, on global capital markets.
Asset tokenisation can effectively reduce information asymmetry, decrease the friction to trade, converting illiquid assets into liquid assets enabling pervasive participation in markets which previously were out of reach to a privileged few. What this means, is that the possibility for the average person to gain access to investment opportunities, financial products and direct their wealth creation, is far greater than ever before.
Asset tokenisation can also be used to capture premiums from assets that otherwise, due to low liquidity would not be actively traded, and thereby enable new economic models based on asset ownership. These can be thought of as fractional stakes (where one can own a certain percentage of an asset), enabling market participation on a greater level where it is possible to ‘purchase one cheap piece’ rather than ‘an expensive whole’.
One such example is a luxury Manhattan condo development located on 436 & 442 E 13th St in the East Village which is the first major asset in Manhattan to be tokenized on Ethereum (Forbes, 3rd October 2018).
Value release through tokenisation:
Think what this can do for access, ownership and extracting value from property, one of the most illiquid asset classes. Not only do many more have a greater chance of investing in property as an asset class, but the flexibility of that investment means one can extract value or liquidate if there is a willing participant to exchange that tokenised investment with. This has been an impossibility as many a real-estate investor will tell you.
Added to this, even property that is occupied, can ‘release’ annuity value through fractionalisation. Property owners can benefit from tokenisation by extending part ownership, earning yields and challenging current financing and mortgage models
This opportunity holds true for other asset classes such as energy, debt and even luxury goods such as sports cars and art.
Precious metals have been used to keep wealth relatively stable through times of economic uncertainty. Tokenisation now allows physical assets such as gold to be converted to a digital asset. What this means is that instead of a lot of paperwork and back and forth between intermediaries, one could buy a stake in gold — real world bullion with ownership would take the form of a digital token held in a digital wallet. JP Morgan have announced that they will be using their Quorum blockchain network (based on the open Ethereum protocol) to tokenise gold bars. Their motivation being that miners and market participants will be willing to pay a higher spread on gold which has been tagged from mine source to endpoint (The Financial Review 29th October 2018).
Decentralised economies — viable micro economies made possible by tokenisation:
It is completely viable to consider how access to basic utilities such a power/energy can form the basis of decentralised economic models governed and maintained by those actually needing the service rather than one authority controlling access to that service as we have today in energy provision.
Energy in whatever form has a market price. This is based on its inherent value which in turn is based on its supply and cost of distribution.
By using blockchain to provide a mechanism to trade and exchange energy or power via a marketplace, buyers and sellers in sustainable sources of energy such as solar are already actively taking control of how they manage this precious resource. Blockchain enables a transparent, immutable record of energy costs as well as an immutable ledger to record transactions. A token acts as a medium of exchange facilitating the transaction as well as conditions of use. This means that an entire economy in power usage can exist ‘off the grid’. This is a true disruptive example of a traditional market.
The SunExchange, a company founded in South Africa and focused on the African market mainly allows a mechanism to trade solar energy via their platform. The idea is that a user solar cells could generate wealth and income via a vibrant market in energy (www.thesunexchange.com).
How tokenisation can capture and record value that was previously impossible:
Creating something valuable is a process. It often means many iterative steps and phases are needed to produce the final output, at which point value or a valuation can be established.
Think about innovation. Inventions have for millennia been a process of trial and error. Great minds have contributed to research to test and iterate. The destination is ultimately valuable (a product, a service) but the journey (all the lessons and contributions along the way) are mostly lost. What if we could harness the entire journey into stages where value could be established. Even if a trial or innovation never made it to a ‘final’ stage — the insights, information, market interest and therefore projected value could be captured on the blockchain. A public ledger of componentised innovation would effectively provide a global library for others to leverage. And this has huge value in itself.
Tokenising innovation is completely possible. Intellectual property can be traded in tokenised form on an ‘innovation’ exchange where market investors can gain early entry into the potential innovation output (product/service) and gain maximum return for their risk appetite. Equally, this opens up huge financing and liquidity options for entrepreneurs and innovators. They technically can offer visibility and transparency to their investors as the innovation matures and becomes market ready.
Tokenization stands to bring massive opportunities for growth and diversification to the asset market. Many of these derive from blockchain technologies democratizing asset ownership and replacing expensive intermediaries. However, the technology is still new and many legal questions remain unanswered.
Nicole Anderson, Managing Partner at Redsand
At Redsand Labs, our mission is to uncover new models and ways of doing business, creating economic value and greater financial inclusion for clients and their markets. Our capability in designing tokenised and crypto asset exchanges and deep experience in financial markets allows us to design and build future economic models which can and are having a real impact.