To read the third installment of this DeFi Series, click here to learn more about the Internet of Value (IOV) and how it is disrupting the status quo.
In part 2 of this DeFi series, we demystified Web3 and indicated that the underlying token-based ecosystem was crucial to its success. In this final series instalment, we take a closer look at the token economy and tokens, their function, classification, emerging use cases, future predictions, and the potential barrier to mass adoption.
In the context of blockchain technology, tokenization is the process of converting something of value into a blockchain-compatible digital token, which then becomes immutable, transparent, and easily tradable.
Any type of asset can be tokenized and placed on a blockchain. Tokens can be placeholders for real-life tangible assets such as oil, gold, and properties, or intangible assets such as licensing, voting rights, and patents. Tokens can also function as utility tokens, have governance rights, or be based on incentives. The SEA token is an excellent example of an incentive token, where the specific goal is to fight ocean degradation through a unified environmental data network. You can learn more about the SEA token in an exclusive interview available here.
The ecosystem is evolving incredibly fast with innovative business models and products. These include fractional ownership, automation and supply chains traceability, as well as derivative products such as tokenized debt, digital asset management, and token exchanges.
In a noteworthy and unusually far-sighted 2015 prediction, The WEF (World Economic Forum) forecast that 10% of the world’s GDP (Global Domestic Product) would be tokenized and stored on blockchain technology by 2027, with the tipping point occurring by 2025.
Similarly, and in line with the WEF, Finoa, a regulated crypto asset custodian specializing in institutional investors, venture capital firms, and crypto hedge funds, projected that the tokenized asset market would reach US$24 trillion by 2027. These predictions seem to be on target, as the market value of cryptocurrencies and tokens totaled US$2.3 trillion at the beginning of January 2022.
NFTs – Non-Fungible Tokens
Due to the magnitude of the token ecosystem, this article will focus on exploring the non-fungible token.
“Non-fungible (non-replaceable) tokens or NFTs are cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other.”Investopedia
Essentially, this means that each digital asset token is verified, certified to be unique through blockchain technology, and therefore not interchangeable or replaceable with another asset. Regardless of whether the tokens move on private, public, centralized, or decentralized blockchains, they all remain non-fungible.
NFTs have been trending and creating waves on social media for a couple of years now. Most people associate them with overpriced JPEG artworks such as Cryptopunk 5822 and Beeple’s Everydays opus, which sold for over US$23 million and US$69 million, respectively. However, there are many other use cases for NFTs, such as authentication, real estate, medical records, academic credentials, supply chain, life cycle analysis, donations, voting, gaming, events, and ticketing, to mention a few.
Tokenized Real Estate as an NFT
Tokenized real estate has recently been gaining traction. An example of this is the independent real estate investment company Mata Capital. The company’s vision is to
“build an investment platform that allows anyone to invest in private equity, real estate, infrastructure, or private debt, with less than one euro, while respecting all the regulatory standards”Mata Capital
Meta Capital highlights some of the issues currently stifling the real estate industry, including low levels of liquidity, transparency issues, costly third-party involvement, and time-consuming documentation. Blockchain technology solves this through the tokenization of real estate and fractional ownership, which has created a completely new business model that is gaining momentum fast.
The following is an example of what a verified and tokenized property might look like.
If a 200m2 property with a value of US$100,000 were to be tokenized into square meters, this would mean that 200 tokens would be issued, and each one would have a value of 500US$. This process could further be fractionalized into square centimetres, where the same house would be tokenized into 20,000 tokens with a value of US$5 each. Therefore, individuals could invest as little as US$5 to get real estate investment exposure. There would be no geographical limitations, and token holders could easily sell their tokens to others at a very low transaction cost, without the entire property being sold. A token could also be used for collateralized loans and other derivative products.
Examples of blockchain-based real estate projects include Lofty, one of the largest tokenized real estate marketplaces, and Realbox, which is a real estate tokenization platform. In addition, Propy is another innovative project that serves as a decentralized property title registry built with the vision of automating the process and
“writing new pages in real estate history, by introducing the technology to allow entirely online and self-driving real estate transactions on smart contracts.”Propy
Tokenized assets in the built environment
The concept of ownership may fundamentally change in the future. Within the built environment, there has been an ongoing drive towards sustainable building materials and a tightening focus on end-of-life recycling. Whilst the development of systems, infrastructure, and marketplaces related to recycled building materials is still ongoing, many believe that blockchain technology could be the missing piece needed for the “design for disassembly “construction model.
Daniel Hall, an Assistant Professor of Innovative and Industrial Construction in Germany, shared his thoughts on possible use cases for NFTs within the construction industry.
“Take for example a steel beam. We create a material passport, containing details such as the chemical compositional and functional data for that steel beam. This data could be attached to a digital model, and that would enable us to create an NFT that represents ownership of that steel beam. The ownership rights to the beam would therefore belong to the owner of the building, who could sell the right to the beam whilst still living in the house, to for example a steel speculator. The steel speculator could hold the NFT for 30 years, till the end of the building’s life, and harvest the recycled steel, trade it prior, or use it for collateral.”Daniel Hall (BeyondBIM Podcast)
Being able to hold NFTs that represent your home’s building components, which can also be collateralized towards a loan, or sold, is powerful. Although this example discusses building materials, it is easy to envision overlaying the process onto almost any type of asset or object and applying it to almost any sector. The possibilities are truly endless.
The lack of regulatory clarity, and harmonized cross-border policies, are often noted as the main inhibitors to faster adoption. A good example of this global regulatory deficit is the high-profile lawsuit filed against Ripple.
In 2020, The SEC (The Securities and Exchange Commission) in The United States filed a lawsuit against Ripple for the illegal sales of unregistered securities, namely XRP. The SEC, notoriously known for regulating by enforcement rather than providing foresighted market guidance, viewed XRP as a security despite being traded globally for 8 years, having a previous currency classification, and being the native token of a decentralized blockchain. XRP is not considered a security in any other country, is listed on exchanges, used by entities, supports NFTs, and trades freely. In the United States, cryptocurrency exchanges have delisted the token, holders are unable to trade it anymore, and corporations and financial institutions cannot reap the benefits of the XRP ledger.
For the token economy to gain adoption, fully awaken and have a meaningful impact, there needs to be a global regulatory consensus or framework. Otherwise, ecosystems will remain siloed from one another.
The tokenized economy is coming, the ecosystem is moving fast, and it will solve problems we haven’t even envisioned yet. This, however, also applies to the law of unintended consequences, in which the behaviour of users and providers may become distorted in unpredictable ways. Whether the lack of regulatory clarity is intentional and designed to put the brakes on the technology, or if it is due to an inefficient and antiquated legal system, once it catches up — there will be billions of dollars awaiting policy.
The views and thoughts expressed herein are those of the authors taking part in the ARYZE Ambassador Program. They do not necessarily reflect the views of ARYZE or its employees.
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