The 4 Token Economy Essentials
What do you need to make blockchain truly useful?
“What is Blockchain actually good for?”
This is such an important, though shockingly un-addressed, question. For years now, people have tried to claim that Blockchain can solve virtually every problem in any industry. The hype machine that is the crypto and blockchain social media space treats it like a “miracle” solution to everything. Obviously, this usually falls flat under even the most basic scrutiny because blockchain, like anything else, is just a tool, not magic. It does no one any good to pretend otherwise. You have to be real and admit that there are some significant disadvantages with the technology *gasp!* which means it’s not the best choice (or even a choice at all) for most applications.
Blockchain’s Issues
One major issue that prevents blockchain from being a perfect match for every situation is latency. Put simply, DLT is slow. Because it is naturally decentralized, blockchain requires some sort of consensus mechanism to distinguish between legitimate and illicit transactions. But every consensus mechanism ever invented is many orders of magnitude slower than a single centralized server. This means that between pressing a button and the expected action happening, there can be anywhere from several seconds to several minutes of wait time. Imagine this as input lag in a video game; you click a command, and then wait an indefinite amount of time for the character to respond. This would make the game un-playable. Or consider what consequence lag might have in high-frequency trading, or when sending critical commands to a military infrastructure. In all these cases, instantaneous real-time communication is non-negotiable.
There have been some attempts to mitigate this inherent latency problem in blockchain, but it always comes at a price to security. The whole point of distributed ledger technology (DLT), what makes it so inherently secure, is inefficiency-by-design. Data is distributed around a network of computers; centralizing things improves speed and efficiency, but makes the system more vulnerable and less secure.
A decentralized network also has much smaller capacity limits as opposed to a centralized system because it needs to move large volumes of information around the network. The most prominent example of this data roadblock can be seen in the Ethereum Mainnet, which at the moment is struggling with congestion and processing only about 20 Tx per seconds. That is a far cry from what centralized services can do. It’s true that Bitcoin solved this problem with its Lightning Network, but that is a hyper-specific platform designed purely for financial transactions and not for the execution of complex logic like Ethereum.
As you can see, once you stop surfing the hype wave, it quickly becomes obvious that the technology is not a good fit for a many applications. So the real question remains: What is blockchain good for, and what do we need to make it useful?
The 4 Token Economy Essentials
1. Documentation
To answer the question ‘what is blockchain good for,’ let’s look at a use case that is unique to blockchain, token economies, and discuss what the technology brings to the table here. Then, we’ll connect those benefits to broader examples.
Blockchain, also known as Decentralized Ledger Technology (DLT), is particularly good at creating forge-proof records. Doesn’t sound too exciting or revolutionary, right? Well, these records are the cornerstone of Bitcoin transactions, for example, and can secure various other financial transactions. But this feature can also be used for any case where records and data need to be forge and revision proof. We call this feature of DLT “Documentation.” Whatever you document on blockchain will be there forever, unchangeable.
This can be used for many things, even outside of token economies. One interesting feature is that you don’t have to store all of the data. It is sufficient to just calculate a unique fingerprint (called a hash) of the data. This hash is only a few bytes in size even if the data — the file, video, soundbite, or whatever — is Gigabytes or even Terabytes. Why is this helpful if the file is stored elsewhere, outside of the blockchain? Because you can prove at any time that you have the original file by just calculating the fingerprint again. As long as the file has not been modified the fingerprint will always be the same.
One additional benefit that comes with records on blockchain is time-stamping. Because the entire network has to be in sync globally, this timestamp is extremely accurate and, thanks again to the nature of DLT, can’t be forged either, not even by the party who creates the record. In the right use case, timestamps are worth millions, even billions. If you could prove, for example, that you were in possession of a technology or a piece of intellectual property at a certain point in time this can break patents — or protect them. The best part is that it is usually not difficult to come up with proof of something; a snapshot, a paper document, a printout, or a cocktail napkin sketch will, in conjunction with a timestamp, probably be sufficient. Outside of a blockchain environment, proving time of origin is much more difficult, if not impossible. Pictures can be photoshopped and documents can be signed at a later date, but not if the data is digitalized and recorded on chain. A bonus feature is that it doesn’t just prove the veracity of data and the timestamp. With the cryptographic signature it is also possible to prove that you are the author of this record. Documentation is a true cornerstones of DLT, as it solves a problem inherent in both digital and even physical spaces, and does it all with no downsides. With documentation, latency issues don’t apply.
2. Tokenization
Second is “tokenization,” or the general ability to account for things digitally. This is the feature that gets all the attention in the media because, without a doubt, this feature has been exploited a lot in the last years and very often for the wrong reasons. Mostly it is associated with greed and speculation. But tokenization simply means that things which exist outside of a blockchain environment or in the real world (pieces or art, commodities, services, intellectual property rights, etc.) get a digital representation. We can also distinguish between fungible (divisible) and non fungible tokens (NFTs). But regardless of this detail, blockchain does a very important job with tokens. It accounts for ownership without needing any centralized bookkeeper. The blockchain is the bookkeeper, and it not only accounts for ownership, but allows tokens to be safely and reliably transferred from one owner to another. This ability to digitally represent both tangible and intangible assets digitally in a reliable environment is one of the greatest, and most misunderstood, features of blockchain.
3. Governance
The third feature of blockchain technology is “governance.” In the real world, agreements can be broken, which happens quite often. On programmable blockchains, such as Ethereum, there is the possibility to create special programs, also known as “smart contracts.” The name refers to these program’s ability to make a transfer between two participants dependent on specific criteria or conditions. For example, the transaction may be triggered after a certain amount of time has passed, or when two or three additional stakeholders give their consent. You can program a wide variety of prerequisites into a smart contract. Binding an action to conditions, which cannot be broken, is something very unique to blockchain. To put it simply, it enables the transfer of values (tokens) between two parties, to be controlled based on predefined conditions.
4. Trading
Then the fourth feature of blockchain technology is trading, or value conversion. In every business transaction there are at least two parties, and these two parties exchange values with each other. When you buy an apple at the shop, the shopkeeper is your counter-party. You give the shopkeeper money, and the shopkeeper gives you the apple. Two parties, two assets. The transactions don’t happen at the same time, and they are not physically dependent on each other, which means that it is possible to give the shopkeeper money without them giving you the apple. Of course this is illegal and impractical (what shopkeeper would stay in business robbing customers), but practically speaking this happens all the time. Maybe not with an apple, but with certainly with other goods, especially when the parties don’t have physical contact. A perfect example of this are online marketplaces like eBay. How many times have you bought something at one of these places and not gotten what you paid for, or even anything at all. The question of who moves first — the buyer or the seller — is a very important one in the real world, costing millions in legal fees (before and after fraud has happened) and millions in intermediaries in order to prevent fraud from happening. DLT helps prevent fraud through features like “smart contracts” and “atomic swaps,” which ensure that transactions don’t happen at all unless both parties are fully able to fulfill their end of the bargain.
Things that happen exclusively in the physical world can’t be affected by blockchain anyway, but some can be digitalized. For example: When you purchase something from a merchant far away there are two digital transactions. One is the transfer of the money from your account to the merchants account. And then there is an entry somewhere that you have a rightful claim to the goods which you just purchased. These two transactions will always be disconnected, step by step, because they happen in different realms. The banking transaction is on SWIFT, and the accounting for your purchase is in some ERP system. The ERP can’t interact with SWIFT or vice versa. If you put these two transactions on blockchain, then they happen in the same realm. Blockchain can also do something known as “Atomic swaps,” which are essentially two or more transactions happening at exactly same time. These atomic swaps can be chained together to essentially make any tokenized asset tradable for any other.
Blockchain Essentials in a Nutshell
Hopefully you can see from these four token economy essentials what DLT, by its very nature, is capable of doing (and not doing.) In a token economy, blockchain technology can be used take physical assets, digitize them, prove them, and ultimately trade them. This makes blockchain the solution for bridging the physical/digital gap that is growing bigger everyday in our increasingly virtual, global world. Again, DLT is not a magical, virtual solution to everything, but it does solve specific real world problems. There are other solutions that these four blockchain essentials fit into as well, such as notarization, or supply chain management — but those are topics for another day.
At CoreLedger, we believe that blockchain is a practical technical solution to improve and solve a wide variety of issues across industries and sectors, which is why we try to cut through the hype and focus on real world applications, not just what’s technically possible.
CoreLedger’s mission is to help businesses of all sizes quickly and affordably access the benefits of blockchain technology. From issuing a simple token, to enterprise- grade token economy solutions, we have all the tools you need to integrate blockchain into your business.
Interested in our results-focused, real-world approach? Then visit our website for more information, or get in touch with us directly to discuss your project.
