Tokenize the world: pros and cons0.23

My previous post looked at how NFTs could be used to transform the gaming and collectibles markets, two immediately obvious applications for the nascent token standard. However, NFTs also have the potential to alter a range of other industries and are part of the reason why some are saying to “tokenize everything”.

Mark W. Yusko

Time to #TokenizeTheWorld 🚀…

  • 9 months ago
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What #tokenizetheworld means

Whilst somewhat tongue in cheek, this phrase means to tokenize many different types of assets - ranging from clear fits like tickets and certificates to more unlikely sounding use cases like identification.

Tokenizing assets would work in a similar fashion to the likes of crypto collectibles. NFTs are, to recall, unique goods with the same attributes. Just as all CryptoKitties are based on similar attributes (such as color, fur pattern etc.), so too are a particular type of ticket - for example for flights - all similar. In the case of flights, attributes would include seat number, priority passenger status, flight number and choice of meal.

Tickets for events are a similarly obvious use case. The current model is broken, with ticketing dominated by TicketMaster in most countries. Tickets to most events are immediately snapped up upon release by ticket touts who then sell them on for obscene profits. This means consumers pay over the odds, and the artist/sporting entity themselves receive none of the profit. Although there are efforts ongoing to reduce this issue, tokenizing tickets would reduce the friction in such markets. Tickets can be imbued with restrictions/rights that:

  • Prevents resale
  • Which automatically sends an amount of the resale profit to the original artist/team
  • Caps the amount they can be resold for
  • Ties the ticket to a certain ID
  • Splits revenue (e.g. between artist, venue etc)

This would hand some of the power back to the artists and consumers.

Blurring the line between physical and digital

While items such as tickets are obvious use cases, proponents also see the ability to tokenize…well, pretty much everything. This ranges from physical assets such as real estate, artwork and cars, to the pieces of personal information that make up an individual’s identity.

Pomp 🌪

@TimRainerr @MarkYusko every asset in the world will be tokenized. it will take awhile for it to happen, but it will change the way we price assets, conduct transactions, and the return profile investors expect.

  • a year ago
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In many ways this is analogous to existing processes. For example, real estate achieves the same effect as tokenizing would - just without the token. REITs allow investors to buy shares to a real estate fund, effectively owning shares of the underlying property. Timeshares give people fractional ownership of a property, divided by time. Tokens would simply become the proof of ownership, in place of the physical deeds.

Tokenizing all assets would, however, drive standardization. By tokenizing everything – and making them all tradable on the same exchanges – it would theoretically open up wider access to liquidity. Investors could buy and sell tokens at ease, able to bypass many of the intermediaries currently taking fees. This would remove many of the barriers to trade.

Proponents also argue that tokenizing items such as certification would both increase trust in the system and likewise remove inefficiencies. University degrees are easily and frequently forged, being usually a mere piece of paper. If the degree and transcript were tokenized, they could then be turned into a piece of information that all universities and corporations worldwide could access and verify – without the need for notaries and translations. This extends further, as it could be used for driving licenses, birth certificates and all the other pieces of information we accumulate about ourselves through life. We could then pick and choose which pieces of information we share with others.

The Oracle problem

Whilst there are some who see tokenizing everything as inevitable, there are many more who argue it is a deeply flawed concept.

 ‘Oracles’ are what allow for interaction between blockchain networks and the real world, when it is needed. For example, a gambling DApp needs some way of receiving data so it can confirm winners and losers. It does this through use of an Oracle, which takes data from external feeds and makes use of the information.

Computer science has a concept of ‘Garbage In, Garbage Out’. If you feed incorrect data into a program, you will receive an incorrect output - regardless of how accurate the program may be. The issue with tokenizing physical assets is that this process is hard to verify. For example, if I tokenize my house and sell pieces to investors, those investors are still going to know that I am actually the owner of my house. If I tokenize my car and sell that off, they will need to know that I won’t simply drive off with my car or sell it a second time to different investors. If I tokenize my university transcript, someone still has to actually verify that I received those grades initially.

All of this would require additional verification, reintroducing many of the stages of friction that were to be eliminated. Parker Thompson put it well when he said that “the token itself is an abstraction that derives value not just from the asset itself, but from the institutions that assure that abstraction maps to the value we wish to ‘own.’”

Furthermore, although we may reduce barriers to liquidity through tokenization, a lack of a token is arguably not the main hurdle to surpass. There are numerous laws to comply with which prohibit or restrict investment across jurisdictions, including stringent KYC/AML regulations. There are also issues which tokenization cannot solve, such as lack of familiarity or knowledge about different countries - I wouldn’t buy a house in Cambodia just because there was a token available, for example.

So yes, we could tokenize documentation – but why would we? A blockchain relying on centralization is just a database. There are more efficient means to share information. This is not to say that tokenization will not become popular – even marginal improvements to efficiency may see it become popular with investors – but it is far from the obvious slam dunk it may appear.

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