Tokenized Money Matters
An overview of digital currency and why it’s important.
To-date, I’ve mostly written about the non-financial token side of web3: collectibles, art, in-world/game assets, rewards, etc.
But as I wrote about recently, there are many pieces of the token economy, and I’ve yet to explore all of them in writing. For most of the next few weeks, I’m going to dig into the money/financial side of tokenization, starting with tokenized money.
Tokenized money refers to the latest iteration of money, where currency is created as a token on a blockchain (or other form of distributed ledger). Blockchains are important as they prevent the double spend problem (digital currency spent more than once) that was prevalent in other attempts at digital cash.
To explain that, let’s use the physical world as an example. If Alice gives a $1 bill to Bob, Alice can no longer spend that $1 as Bill now owns it. Before blockchain, this was extremely difficult to prevent with digital cash and you could double spend the same dollar (think how multiple people can use the same image on Google); however, now we can have verifiable digital ownership of money (and other asset classes).
So, with regards to tokenized money, there are four main product buckets that the market has come to accept. As a side note, you’ll notice none of the below are called “fungible tokens” or “FTs”, as this side of the market is more mature than the “non-fungible tokens” or “NFTs” market.
- Cryptocurrencies: Bitcoin, Ether, MATIC, etc. Typically are used for payments, investment, or network management; however, are often associated with volatility as the value of the currency is not backed/tied to any underlying asset/assurances.
- Stablecoins: USDC, USDT, etc. Similar to cryptocurrencies in nature, but are supposed to be pegged and not volatile in nature. Stablecoins maintain stability by backing their creation with some underlying asset (cash, securities, commodities, etc.).
- Deposit Tokens: JPM Coin, Signet, etc. Operating in more of a controlled / regulated environment, these tokens are created to represent the deposits that a regulated institution collects today and can be used to more efficiently perform banking functions like cross-border payments.
- Central Bank Digital Currencies (CBDCs): Digital Yuan, e-HKD, e-Krona, etc. Tokenized money that is issued by a country’s central bank and is a liability of that central bank akin to existing forms of money, e.g., cash.
Each of these are forms of tokenized money, but come with slightly different characteristics, architectures, and use cases. Starting from cryptocurrencies at the top of the list, they get more controlled / regulated as you move down the list; however, each are important elements of the evolution of money and payments.
As we think about the future iteration of the internet, understanding tokenized money is important for three main reasons: (1) solving double spend; (2) near-instant settlement; (3) programmability of money. These three driving forces have dozens of financial institutions, nearly a hundred of central banks, and thousands of blockchain startups investing in the future of money.
More to come on tokenized money, but hopefully this served as a high level overview for what it is and why it’s important!
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