No one comes to a blockchain article for etymology, but humor me nonetheless. The
word token shares the same Old English root, tācen as the word for teach. A sense of showing, revealing, clarifying, or making something transparent is inherent
in the word tācen. The word also possesses an equal sense of explaining, empowering, and informing.
One of the many reasons Mary Lacity and Horst Treiblmaier’s edited collection Blockchains and the Token Economy: Studies in Theory and Practice is noteworthy is that it captures this double meaning. The token economy has the potential to disrupt numerous industries precisely because of its ability to increase transparency, reveal new areas of value creation, and empower individuals in ways previously not possible.
The digital token economy borne from current blockchain innovations possesses the unique ability to empower individuals as well as create financial systems that are predicated on shared community governance rather than centralized institutions like banks, credit card companies, or notaries.
If you are new to blockchain and want to learn more about it, visit the Blockchain Center of Excellence website.
What Is the Token Economy?
Token economies refer to markets whose assets are represented by digital tokens. These
tokens can be coins such as Bitcoin and Ether or NFTs representing real-world assets like artwork, real estate, or even random selfies. The ownership of these digital assets is recorded on a distributed electronic ledger,
a blockchain. These assets can then be exchanged peer-to-peer and are automated via
smart contracts, which are programs that run when certain predetermined conditions
are met – think of them as if/then statements: if a buyer sends 99 Ether, then a seller sends them a token that permanently records
the rights granted to the buyer in the smart contract.
Blockchain makes the token economy possible because buyers and sellers no longer need to rely on banks or centralized institutions for many functions. The gatekeeping roles played by these institutions – verifying credentials, tracking assets, bookkeeping, and more – can be played by a blockchain that relies on shared community governance. Blockchain’s shared community governance means it does not require trusted third parties to serve these functions. If the token economy just improved the efficiencies and transparency levels of banking and lowered transaction costs, that would be revelatory. But, as Lacity and Treiblmaier indicate, the implications of a token economy go far beyond banking: “imagine a world of true individual empowerment, whereby every person digitally controls their identities, credentials, work products and assets.”
The token economy isn’t just about more efficient, transparent ways of conducting transactions. It’s about individuals being able to have more control over their lives in a variety of ways. For example, individuals can make verifiable claims about their citizenship, education, skills, healthcare; unbanked individuals can have access to cheap financial services; individuals from artists to farmers can have a bigger share of the profits for their labor and goods; and innovators can have increased access to capital to fund new projects.
How the question "what is the token economy" will be answered will depend on a variety of factors. Namely, how trusted third-party organizations respond, the level of resistance posed by “dominant individuals, organizations and governments that fear loss of power, influence, and money,” and upon the extent to which standards-making and regulatory bodies can keep pace with emerging technologies’ fast pace of change.
Disrupting Business as Usual
Any innovation possesses disruptive potential, but few innovations possess the sheer
scope of the digital token economy. As the chapters in Blockchains and the Token Economy demonstrate, tokenization’s impact can be felt from routine purchases like event
tickets to large, high value industries such as real estate. What makes tokenization
innovative is its ability to fractionalize investment and ownership beyond traditional
investment models. This ability to greater fractionalize can create greater liquidity,
transfer and mitigate risk in more efficient and secure ways, and allow lower-income
individuals to access and participate in capital markets.
For example, Max Zheng and Philipp Sandner predict that the real estate industry, which often suffers from high transaction costs, complexity, and corruption, will be disrupted as tokenization will be used to fractionalize investments. Instead of fractionalized investment being the province of a handful of well-heeled individuals sharing the profits, tokenization “can create greater accessibility to investors because the digital asset itself has no limit to how small it can be fractionalized or by whom it can be acquired. In fact, the buyer could be a low-income individual based in Asia who could buy tokenized asset-backed real estate in Liechtenstein.”
Real estate, however, is not the only large sector that could benefit from tokenization. Insurance has a market size of $5.8 trillion despite suffering from complexity, fraud, and high transaction costs. Tokenization has the potential to “transfer risk more efficiently, transparently, and securely, as well as increase customization and agility.” Coausert, Vadgama, and Xu rightly note that as use cases and user activities increase, how payment, insurance, and governance tokens to meet these objectives will become clearer. Stakeholders in another high-profile industry, arts and collectibles, could also see the use of tokens to fractionalize assets, whether via “securitized fractions traded via a company-owned exchange …[or] tokenized fractions traded via a public ledger.” While the conflicting values between regulators who want transparency and guarantees of provenance and collectors who value privacy must be balanced, the authors – Barbereau, Sedlmeir, Smethurst, Fridgen, and Rieger – argue that tokenization will allow investors and creators opportunities "to exit single-provider, proprietary systems.”
Tokenization and blockchain technologies are not solely solutions for high-value assets; they also can benefit more routine, smaller transactions like event tickets. Event ticketing – as anyone who has bought one recently can attest – is an industry rife with counterfeiting, fraud, and secondary sellers. Regner, Schweizer, and Urbach thus designed an event ticketing system built on Ethereum that uses NFTs to “overcome the weaknesses of existing non-blockchain event ticketing systems.”
The remainder of the chapters examine the disruptive potential of the token economy in markets as diverse as gaming, fund-raising, and job markets while also discussing the opportunity tokenization possesses in new markets like the metaverse. As the varied authors demonstrate, the token economy both disrupts existing markets while also revealing the potential the token economy has to unearth new potential market opportunities for a wider range of stakeholders.
The key thing about this disruption and new knowledge is what we do with it. As this book demonstrates, tokenization presents myriad opportunities, which thus present myriad new choices for us as citizens and consumers to harness these possibilities. The choices we make – and the reality those choices construct – may put us farther down the path towards a more equitable, inclusive, and empowered society.