The advent of cryptocurrency, particularly since the rise of meta-token platforms like Ethereum, has spurred a new type of blockchain based business opportunity known as “tokenization”. Tokenization is the conversion of some aspect of a product or service into a tradable, digital token. Tokenization presents challenges to the blockchain entrepreneur, investor, and user alike. Blockchain entrepreneurs are not only faced with the task of developing a successful product, but also a functioning internal economy that will deliver value to token holders. Recently, the promise and the challenge of tokenization is receiving increased attention in the blockchain industry.
One such example is SingularDTV, who on April 5th, 2017 announced the formation of CODEX, a research and design lab dedicated to the development of tokenized ecosystems. CODEX will not have a public facing website. Instead CODEX will primarily function as a platform for SingularDTV to develop strategic partnerships with blockchain start-ups it identifies as having potential to add value to SGNLS. CODEX will focus on projects that aim to launch on the Ethereum network as an ERC20 meta-token. Even though CODEX won’t be public facing, its formation speaks to the importance of better understanding the ERC20 token ecosystem and tokenization in general.
Blockchain research is still an emerging industry
There is great need for more research into tokenization, public blockchains, and token economies. Smith + Crown has contributed to meet this need. We recently released a report on the various token functions that tokens have played in token sales. Smith + Crown is also actively curating a comprehensive database of academic and professional research and will be releasing more soon.
Other organizations have also contributed valuable insight into tokenization. CoinFund produces excellent analysis on a variety of topics, including the complexities of token economies and trends in token sale terms. CoinDesk Research periodically reports on the state of blockchains as well as industry-specific market analysis. Blockchain@UBC, recently formed in Canada, is focused on how these emerging technologies can be leveraged to benefit Canadians.
Tokenization isn’t easy
The creation of a token economy from scratch requires careful planning and a deep understanding of the blockchain industry. One of the most important questions that a blockchain entrepreneur will have to decide on is: “what role will my token play on the network and what benefits will it confer to token holders?”.
In Smith + Crown’s Token Rights report we identified six token types and the ‘rights’ that they grant holders. Choosing what role a token will play on the network has significant implications for the short-term and long-term health of the network, how the token will be valued, and even the potential market for token-holders.
Here are some common factors that should be considered in the design of any token:
- Regulatory Environment : If the token functions as a share in a company or distributes profits or dividends, then it may be regulated as a security in certain jurisdictions.
- User Experience of the Token Economy: Token economies, particularly multi-token ecosystems like Steem’s, can be difficult for users to understand. If it’s not intuitive how the design of the token economy will benefit token holders, then it could deter new users from joining or lead to massive volatility as users learn through trial and error.
- Incentivizing Participation: Many projects want to incentivize users to participate in block creation activities or take on specific roles on the network. In these cases, users need to be compensated for contributing time and resources to the maintenance of the network. This means that projects will need to consider how to reward users in a way that is fair and sustainable to them and to the rest of the community.
In the future, Smith + Crown will be allocating more resources to researching tokenization and token economies.
Shortly, Smith + Crown will produce a report using Numerai as case study in tokenization. Numerai introduced a token as part of its hedge fund + distributed artificial intelligence platform. Stay tuned!