When discussing the benefits of cryptocurrencies and blockchain, it is important not to overlook the importance of Tokenisation.
What Is Tokenisation?
The way I use the term, Tokenisation is the process of representing some asset like land, money, shares, in terms of electronic units.
Tokenising an asset, in this context, is using a number of electronic identifiable units, say one million tokens, to represent portions of that asset.
Thus, if you tokenise a piece of land with one million tokens, then each token would represent on-millionth of the value of that piece of land. (Using this definition, a token would be a “security” but that is not really important to this blog post.)
Tokens/electronic units can be a real driver of value if you can trade them securely, across the internet, across the world, like you do cryptocurrencies.
One example of Tokenisation using cryptocurrencies, is built on top of the blockchain for Ethereum, one of the most popular cryptocurrencies.
The Ethereum blockchain uses Ether as its currency. But Ethereum also has a specification, expressed as the ERC20 standard, that allows people to define identifiable “flavours” of Ether that use that underlying currency to create quasi-cryptocurrencies.
These flavours of Ether fit our definition of “Tokens”. The amount issued of a particular token can be controlled and their ownership can be tracked and recorded on the blockchain.
Tokens can therefore be traded in three ways:
a) using regular currencies (“Off-Chain Transactions”). For example, I give you $100 by cheque or cash and you send one (1) token from your wallet to my wallet and the blockchain records the change of wallet address associated with the token.
b) using the ledger that is the underlying Ethereum blockchain. For example, through functions in the smart contract, two people buy and sell a token using the Ether cryptocurrency.
c) in another extreme variety of Off-Chain Transactions, I give you $100, you give me the private key to your wallet for me to do as as I please with the token. In this case there is no transaction on the blockchain. [Of course, this may be problematic for both parties unless it is a multi-sig wallet where you don’t know my private key.]
This opens up a myriad of possibilities for people to use these tokens – depending on a person’s level of comfort or desire to enter the world of cryptocurrencies.
If you are comfortable being invested in Ether you can choose to buy or sell tokens using Ether (option (b) .)
If you do not feel comfortable having exposure to the volatile currency that is Ether, you can choose to buy or sell tokens using Off-Chain Transactions limiting your Ether holding to the amount of Ether required to carry out the transfer (option (a)).
Going even further, if you are absolutely allergic to holding cryptocurrency/Ether beyond the tokens you are holding in your private wallet, you may simply give your private key away (option (c)).
[This description doesn’t deal with issues of price discovery, i.e. what is the price of my token right now?, and escrow, how do I give with one hand while simultaneously taking payment with the other? That can be the subject of other articles.]
And So What?
Well just the ability to transact for a token on a worldwide basis without being bound to use a particular currency, or a particular forum/marketplace, or even a computer (remember that a wallet can just be a paper wallet) is path-breaking.
Now, a token can be used to represent various kinds of items of value. Such an item of value can be anything that can be transferred lawfully by agreement between private parties.
[…The reason I say lawfully is that what you want to sell has to be sell-able in both the buyer and the seller’s country. For example, across the world, it is much more common and easy to sell a chair or computer rather than … a person.]
Representing such an item of value with a token suddenly makes it easy to sell to anyone anywhere in the world without needing the permission of your broker, your bank, and unless your government explicitly prohibits that kind of transfer to that kind of person, your government.
Suddenly your mind explodes with ideas:
yes, I could buy bananas from Vietnam but I’ve heard banana exports are really profitable and would love to invest cheaply there using tokens (bananacoin.com!);
yes, I could buy maple syrup from Canada, but I’ve heard the real estate market there is a really safe bet, and so I want to invest there using tokens.
Cryptocurrency Tokenisation now allows you to invest in, benefit from, and buy and sell 1/100th of an asset across the world, from your sofa. You better watch out- your ability to balance your portfolio is about to get both harder and easier.
This blog post is the introductory one in a series of posts relating to Tokenisation of assets using blockchains like Ethereum. This one was meant to introduce what Tokenisation could be, how tokens can be traded worldwide and mention examples of what assets tokens could represent. In the next post, I will discuss in detail what types of assets I think are good for Tokenisation.