The Tokenisation of (every)Thing: creating solutions we want & problems we don’t need.
This feature looks at whether or not current and upcoming tokenised projects are solving existing & imminent problems or creating new ones as we look to prepare ourselves for a tokenised future. The author’s opinions are his own. The original post can be found on www.blockpeeps.co
Any innovation, once past its nascent validation and viable acceptance is bound to grow rapidly before it reaches a steady rate of adoption. This is usually followed by making way for new forms of innovation to eventually replace it. The first driver for innovating is always a mix of lessons learnt from the past and creating a more feasible solution of existing challenges and needs that the current status quo is not able to fulfil anymore. No other form of innovation cycle better epitomises this trend than the technological innovations of the past 50 years. Whether it is the earliest computers trying to improve efficiency and operability or the internet standing up against the cable for global connectivity, both after initial skepticism and adoption by a few daring enthusiasts have completely revolutionised the way we operate and engage; Only to be replaced by laptops, mobile phones & phablets for the former and different versions of the internet (intranet, Web 1.0 & Web 2.0) for the latter.
But innovation to solve any problem or challenge at a micro or macro level goes through a few stages of evolution. William Abernathy called this pattern as Spectrum of Innovators [Abernathy & Utterback, 1978] in a paper he published in 1978:
Past studies of innovation imply that any innovating unit sees most of its innovations as new products. But that observation masks an essential difference: what is a product innovation by a small, technology-based unit is often the process equipment adopted by a large unit to improve its high-volume production of a standard product.
His point was that while radical product innovation is often caused by small independent creators or group of innovators, true adoption is usually brought by larger corporations who extract the full potential of product innovation via process innovation. At what point in time does process innovation takes over product innovation and whether they are a part of a zero sum game is up for debate. But why process innovation usually arises is because of the causal effect of the problem / needs & solution cycle that is brought about by Product Innovation.
Looking at the cryptographic tokenisation of things today, does this mean that true global adoption and dominance can only be brought by enterprise or institution led process innovation? While this is anyone’s guess, this write up is going to take a closer look at one of the possibilities for ‘why’ the Tokenisation of (every)Thing (Product Innovation in this case) alone isn’t enough. This will be done by dividing the current wave of tokenisation into three aspects -
Tokenising Today’s Problem
The first reason for any form of product innovation is always to solve an existing problem or a challenge that the current state of affairs is not equipped to handle anymore. This stage is what one would call the phase of pioneering. Satoshi Nakamoto created Bitcoin on the back of the distrust that the Global Financial Crisis of 2008 had created when it came to consumer and corporate banking [Nakamoto, 2008] . Existing financial systems across personal and corporate financing have some very complicated due to the large number of intermediaries that made financing, remittances and other forms of payment services expensive. There was also the question of how much can one trust the Central Banks due to their Quantitative Easing and Bailout policies that led to almost zero interest rates and rising costs of inflation. Bitcoin became a potentially viable solution to not just bypassing the long list of intermediaries through a peer to peer network for payment but also created a trustless payment method through its underlying technology (Blockchain). Its limited supply also provided a hedge against rising inflation. Bitcoin was followed by an influx of other cryptocurrencies and tokens (with their own native or non-native blockchain) to solve problems that went beyond financial services.
Ethereum’s blockchain and the creation of smart contracts led to disrupting the supply chain ecosystem across a range of industries. An exponential rise of tokens creating their own micro-ecosystems across shipping, metal extraction, oil & gas, real estate and FMCG got streamlined by institutions to create more process oriented blockchain based solutions. In this case, IBM has been the stalwart in enterprise led blockchain solutions through Hyperledger that is eliminating middlemen in the travel industry and creating digital passports that streamline the ‘know your supplier’ process for large corporations. Tokenisation is even battling humanitarian issues such as child labour by creating a transparent and non-mutable supply chain for metals such as Cobalt that are not sourced from conflict ridden areas. The ability of blockchain to track transitions, create verifiable records and proving identity has been widely accepted by the luxury & fashion groups which have been fighting the multi-billion dollar counterfeit parallels for decades now [Vei & Monari 2018].
Tokenising Tomorrow’s Problem
While Sony’s Walkman was was a pioneering invention for portable music, Apple’s iPod was visionary in digitising and creating a new demand and need for the future for the music industry. Blockchain based tokenisation is not just solving existing challenges and problems but is making proactive headway in creating needs that we necessarily had not envisioned. Tokenisation can become the global platform on which we can achieve financial inclusion or bank the unbanked across all strata of society. Fractional ownership using cryptographic tokenisation has already unlocked asset classes that have previously exclusive to a select group of investors. Tokenising Art Investment as well as VC companies issuing equity tokens for dedicated tokenised funds is a positive sign for previously illiquid investments across different risk / return profiles made accessible to retail market.
The early internet era was heralded as the first decentralised means of connecting the world. But true global connectivity was achieved in the 21st century with the rise of Social Media platforms such as Facebook, Twitter & LinkedIn. The unprecedented growth of these platforms was a blessing in disguise for digital marketing as it provided marketeers a new avenue for generating revenues through multi-channel ad formats and leveraging their data managing capabilities of their targeted audience. Abundance of advertisement led to ad revenues that had never been realised at such a large scale. And while the issues of data privacy and ownership were flagged since the very beginning and only amplified in concern post the Cambridge Analytica scandal, social media based marketing also raised the question of how the end user, who has no ownership over his/her data, is really benefiting from a myriad of ads? The answer came in tokenising attention by the Brave browser through its BAT tokens and tokenising data & ownership by IBM who filed patent to launch their own browser on blockchain.
Tokenising to Create Problems
It’s been 11 years since Bitcoin was launched and the fact that product development and innovation in Blockchain is still growing at an unprecedented rate is a testament to its potential to solve problems across sectors but also create needs we didn’t even know existed. But innovation, if unchecked or not viable can very much pivot from problem solving to irrational exuberance. And cryptocurrencies and eventual Tokenisation of (every)Thing are no exception to this. Innovation can create solutions for problems that exist or don’t yet exist but can very well create problems that we do not necessarily need. These second order issues can arise from viable solutions such as fractional ownership in Art Investment and VC funds but also by tokenising things that really do not need tokenisation to begin with!
The tokenisation of illiquid investments such as Art, Venture Capital and Private Equity is justified on the grounds of fractional ownership and opening investment vehicles to retailers that haven’t had prior exposure to this asset class. Do VCs and Art Investments benefit from a broader investor base? Yes, but they also have a scope to bring some paradigm shifts that can be more of a bane than boon. Besides addition of liquidity premiums in an already overvalued start-up world, we are opening a long term investment vehicle to an investor class, that might not necessarily have the patience (7–10 years for returns) nor the appetite for the risk taking, that institutional investors are able to take. We also run the risk of altering the risk / return profile of asset classes that have traditionally provided diversification in a broader portfolio [Damodaran, 2005]. By allowing everything to be tokenised and thus trade in the secondary markets, we streamline this diversification and can run the risk of putting all eggs in one risk/return basket.
Going beyond the realms of financial markets or even any other materialistic pursuit on Earth, we also have to face the potential consequences of tokenisation of things that aren’t really ours to tokenise — air, water or even Moon! The Diana project proposes its tokenisation of moon as a means to take the power away from tokenising outer space bodies by private enterprises and giving everyone the opportunity to stake a claim on it [Goo, 2019]. And while the UN Outer Space Treaty has provisions in place for safeguarding moon and other celestial bodies from national appropriation, we might not necessarily need Diana to be the Robin Hood to fight civil and private enterprises. And while Diana may succeed in tokenising the Moon and eventually other planets and give ownership to anyone by means of holding those tokens, does it have the notary authority to equate ownership of those tokens to actual ownership? How is this tokenised colonisation any different from the European Imperialism from a few centuries ago? And if we discover life on these celestial bodies? Will they not have the rightful claim on those lands or balls of gas?
Innovators of Blockchain projects and processes need to be wary of the challenges they are trying to solve and the problems they might create in its wake. We have already gone through cycles of financial crises, colonialism and irrational exuberance. Cryptocurrencies and tokens are already fighting their own battles with regulators and governments of what they actually represent. We can’t run the risk of tokenisation of everything becoming a headache when its intended purpose should be to cure one.
References
Abernathy, W. J., & Utterback, J. M. (1978). Patterns of industrial innovation. Technology review, 80(7), 40–47.
Nakamoto, S. (2008). Re: Bitcoin P2P e-cash paper. Email posted to listserv, 9, 04.
Vey, A., & Monari, A. (2018). How blockchain can help the fight against counterfeit goods. LSE Business Review.
Damodaran, A. (2005). The cost of illiquidity. NYU Stern School of Business.
Goo, J. (2019). DIANA: Blockchain Lunar Registry. www.diana.io
