The Internet of tokenised assets

Non Fungible Tokens and their unique offerings for the Internet 2.0

The Internet 1.0 introduced us to many revolutionary things like Social Media, Mobile Apps, Online Dating, E-commerce, Virtual Assistants and IOT devices. All of these services enabled borderless communication for humans and disrupted the way humans interact with each other.

Internet 2.0 or blockchain is solving a bigger problem: trustless communication and value transfer over the internet. Blockchain enables peer to peer transfer of value, without going through a bank, payment processor or aggregator like Paypal. Blockchain is transforming almost every industry of our economy. Technologists and economists are already referring to it as The Trust Protocol and A New Social Order.

Tokenisation is a unique way of representing ownership of an asset, without ever needing a centralised issuer.

The blockchain tech allows everyone to tokenise anything, including personal data and even your attention. Tokenisation will completely eliminate the role of middlemen, thus resulting in faster, cheaper and more secure direct transactions. Tokenisation of immobile physical assets can create immense value for the investors and regulators. The moment we represent any asset digitally via tokenisation, it becomes easier for shareholders to track, transfer and hold it — essentially creating a globally tradable market for both digital and physical asset classes.

Tokenisation will enable seamless bundling and unbundling of assets

Bundling means repurposing value that has already been created to create much more value by combining multiple small assets into one large asset. The more assets in a bundle, the higher the perceived value of the bundle will be. Unbundling is the opposite of bundling, it means splitting an asset into multiple smaller assets. Bundling and unbundling opens disruptive new ways of transacting and investing in physical assets.

Tokenisation of assets will enable network effects for illiquid asset classes

Product management experts call it ‘The Network effect’ when a product or service becomes more valuable as more people use it. Facebook, Twitter, Airbnb and Medium are some of the product companies which leveraged network effects and created the winners-take-all market. If we tokenise traditional asset classes, then it will attract investors from all across the world and enable public market liquidity for these asset classes. This means it will allow investors to day trade (intra-day trading) these assets, which will increase the demand with a low barrier for the entrance of individuals, resulting in network effects for these illiquid asset classes.

With network effects, these assets will catch the attention of regulators. Tokenisation will help regulators as well, as it will become easy to enforce securities and compliance laws on representative tokens as compared to underlying physical assets. Smart contract enforced regulations will improve transparency and visibility for both investors and regulators. It is even possible for regulators to track movements of assets in secondary markets which is almost impossible for traditional assets.

What are Non-Fungible Tokens?

Bitcoin, Ethereum and other Top 100 CMC tokens are fungible tokens. An object is fungible if it can be replaced by any other similar looking object. In the crypto context, a token is fungible if it can be replaced with another identical token. For example, all the bitcoins are identical, no matter which block minted them. Most of the tokens that we see today are fungible because they were designed to be medium of exchange and store of value like the dollar, euro etc., so it does not make sense to assign every token unique identity.

Non-fungible tokens (NFTs) are unique and digitally scarce blockchain tokens which can not be replaced by any other identical token. For example, my house and your house are non-fungible objects as both the houses are not identical and hold unique properties, so we can not represent these assets using the same class of ERC20 tokens. Fundamentally, NFTs are coloured coins (a coin which has some unique metadata or core information). Colouring these tokens uniquely helps us verify the authenticity of the asset and issuer without any centralised party intervention. It is also possible to track and identify the flow of these tokens (ownership transfers) across the networks seamlessly. This makes coloured coins better choice for representation of unique assets on blockchain as every asset is unique and can not be replaced by any other identical asset.

Coloured coins have been there for a long time since the inception of the Bitcoin Blockchain, but there was no formal way to issue and transfer these tokens via bitcoin wallets/clients making it difficult for end users to adopt it.

Last year, Ethereum community officially recognised NFTs via ERC721 standard proposal. This innovation has been very well received by the developer community across the globe. Developers are developing all sorts of unique products which were not even possible before, ranging from scarce collectables to tokenised physical assets.

Tokenising everything with NFTs

Almost everything can be represented on a blockchain using NFTs including cars, rare art-work, cats, humans, our houses and virtual land. Assets which are openly transferable and hold unique value are perfect use cases of tokenisation using NFTs. Some examples are as follows:

API Keys

Tokens are by design analogous to paid API keys. We can leverage composable non-fungible token standards to issue customised, openly tradable API keys as per specific pricing plans and requirements of the end consumer. Additionally, standards like ERC948 can be utilised for managing recurring payments, subscriptions and renewals for API keys.

Personas

We can represent the personas of individuals on blockchain with NFTs. Existing KYC and reputation systems like uPort can leverage NFTs to display the user identities and reputations on public blockchains without ever compromising on security or privacy of user data.

Virtual goods, in-app rewards and game credits

Developers can use NFTs for issuing digitally scarce virtual goods like rewards, avatars and shields in apps and video games. These goods can be traded/exchanged on open collectables exchanges like Opensea and Etherbit. Seamless transaction capabilities of virtual goods add 20–25x more value for end consumers. Also, these virtual goods hold the same properties as Bitcoin: censorship-resistance, algorithmically managed scarcity and permissionless attribute make NFTs perfect for the store of value. Decentralised nature of blockchains ensures that even if your game developer disappears, your hard-earned virtual goods still hold the same value as everything is recorded on immutable, tamperproof ledger.

Cryptokitties has already validated that NFT based collectables are disruptive in nature: Ethereum blockchain was congested for weeks during December 2017 when Cryptokitties went viral.

Real estate assets

Real estate is one of the most lucrative investments to make today. But investing in real estate need significant capital and carries an inherent risk of low liquidity (lockup of funds for a long time period). Ownership transfers of real estate properties require a lot of paperwork which creates friction for individual users to invest in them. If we tokenise real estate properties, it can create a frictionless global liquidity pool for assets while ensuring the regulatory compliance requirements with the help of protocols similar to harbor and polymath.

Intellectual Property

IP rights management is one of the most obvious use cases of decentralised systems. Transfers of IP rights is a cumbersome process and requires a lot of offline paperwork. Filing application and being granted patents for the same property in multiple countries if you want to use the tech or sell a product (with protection/ cover) is a fundamental problem. Tokenisation of IP rights will create a seamless, uniform, authentic and borderless process for uniquely filing and transferring of IP rights. In-protocol smart contracts can be utilised to capture important data points like creation date, filing date, first to file etc.

Domain names

Buying and selling domain names is a legitimate and exciting business. The global Domain Name System (DNS) service has an estimated market size larger than $300B. Tokenised domain names can enable efficient, trustless transfers of domain names in secondary markets. Decentralised exchanges and escrow services like 0x can be utilised for facilitating transactions of domain name reselling.

Conclusion

“Blockchains port the market model into places where it couldn’t go before”

— Naval Ravikant

Tokenisation is an innovative concept which can help us reinvent the global financial system. It can revolutionise the way we transact, store, lend and exchange value. Those days are not far when we will have to depend less on lawyers, accountants and auditors as everything will be managed by blockchain and smart contracts. Users will be able to see the real-time performance and audit reports of their assets and will be transacting borderless using the smartphones.

At the moment, there are three major challenges that are stopping the mainstream adoption of blockchain and tokens: user experience, scaling of the base layer protocols and positive regulations. With time, we will see significant progress on these fronts, and it will be a journey similar to Internet 1.0 itself, from ARPANET to INTERNET.