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Insights |04.02.2022

Tokens: from an asset class to the driver of a decentralised economy

Technological advancements are altering all aspects of our economic and social life. One of the most influential technologies driving this disruption is blockchain. It decentralises value creation in the digital economy, a paradigm shift from the centralised platform business model that has shaped the economy of the last 15 years. 

In this article, we introduce the concept of tokens, which act as enablers for peer-to-peer transactions and the decentralization of the digital economy at large. A concept that takes its roots in the desire to find a solution to the major inefficiencies of traditional finance and the centralised nature of the current digital economy and beyond.  

What are tokens? 

A token is a unit of value issued by an organisation, accepted by a community, and supported by an existing blockchain. In simple words, a token is a representation of something in a particular ecosystem, which can be tangible (physical) or intangible (non-physical, i.e., a service) – from money to art, from land ownership in metaverse to voting rights.  
To buy a crypto token you need to be an owner of a crypto wallet first. The wallet is a secure storage location for your private key. When you select the token to purchase, you sign the transaction with your private key. It invokes the smart contract mechanism that associates your public key with a certain token. A smart contract is a digital contract stored on a blockchain that is automatically executed when predetermined terms and conditions are met. After the transaction, you become the token owner, and information about your ownership is maintained on a decentralized database, the blockchain. 

To learn more about tokens in general, with their distinctions and examples, as well as differences between coins and tokens, check out our definition blogpost here.

The disruptive potential of tokens  

The Bitcoin blockchain was the first to push towards a decentralized ecosystem. Since its inception, it has spread worldwide, with an increasing number of people investing in it or using it as a medium of exchange. However, Bitcoin is limited in use cases and scalability despite its meteoric rise. Tokens emerged to broaden the crypto ecosystem with features and use cases that go beyond simple transfer verification. 

Engaging with clients or partners and funding projects

Within a few years, Bitcoin went from a barely noticeable novelty to one of the prominent topics in various industries from art to tech. Since 2016, so-called Initial Coin Offering (ICO) have made their entrance in the crypto space, as innovators rushed to build a large number of projects. ICOs are the equivalent of Initial Public Offerings (IPO) in the blockchain space. ICO allows companies and projects to raise funds in exchange for payment, utility, or security tokens. However, in 2017, already 47% of all ICO had reportedly failed [1]. Other studies see the number of failed ICOs in 2017 at up to 80 % [2]. Since then, it is estimated that the number and total value of ICOs have continued to plummet [3][4]. The reasons for this are manifold and have to do with the markets being overwhelmed to absorb the number of ICOs, coupled with many fraud cases.  

New coins and tokens are still being created, although the traditional form of ICO is becoming increasingly rare. Instead, we see new approaches towards public offerings in the crypto space. An Initial Stake-Pool Offering (ISPO), is such a new variant of an ICO for funding cryptocurrency projects. In an ISPO, users deploy their cryptocurrency holdings (mostly ADA, the cryptocurrency of the Cardano Blockchain) through a stake pool operated by the cryptocurrency project. This funding model gives investors complete control over their assets and, while encouraging long-term investment, it provides the security of their stake as well as the freedom to opt-out any time. ISPO is pioneered by MELD (one of the SVBS1 – Disruptive Tech AMC companies), a borrowing and lending protocol for crypto and fiat. However, more than the new ICO approaches, token innovations are pushing the boundaries of what was previously possible. Today, for example, tokens allow ownership and management of unique content and new forms of governance. 

Own and manage your unique digital content 

Non-fungible tokens (NFTs) are one of the main drivers for the expansion of crypto ecosystem use cases and played a crucial role in the adoption of crypto last year, leading to the bull market in the summer of 2021. In the third quarter of 2021, trading in NFTs climbed to $10.7 billion an increase of more than 700% from the previous quarter [5]. Its core idea is close to the attributes of physical assets owned out of genuine interest or for collection and sale, like art. If you purchase a digital piece of art, the proof of your ownership is saved on the blockchain, and anybody can see that it belongs to you.  NFTs are a significant trend that brought new players into the crypto space exploring the same token approach for potentially even more revolutionary use cases.  

The metaverse, the virtual universe, in which we find ourselves every day when we are online and which is expected to merge with our physical lives, is likely to be determined by NFTs. The metaverse is still in its early stages and what precisely it comprises is still to be defined. But it will clearly influence the future of the internet, and some set the market capitalization already at $ 48 billion with an expected growth rate of 43 % each year [6]. The metaverse’s environment allows for the creation or purchase of NFTs for a variety of purposes, ranging from gaming to joining virtual communities to owning virtual real estate [7]. In the same light, NFTs also allow us to manage our digital identities thus changing the economic dynamics of the platform economy. So far, the internet as we know it is dominated by large platforms, e.g., Facebook, Amazon, Google, to whom users transfer their data in return for services. This centralization of data and hence the control over it erodes trust in the digital economy, limits competition, and leads to public outcry on privacy issues and ultimately to legal action. This is because platforms that collect and hold data tend to overuse – and even abuse – the data they ‘own’. This suboptimal allocation of data stifles innovation and hence limits economic growth. Tokens provide the means to change this. Securing ownership of the data gives users the opportunity to renegotiate its value. So-called access tokens [8], while still in a nascent stage, could provide novel ways for managing our digital identities on social media or the way we do KYC (Know-Your-Client) onboarding and due diligence in the financial sector, or managing our health data. This will allow for entirely new business models in various industries. 

Decentralising control over economic and social issues 

DAOs, Decentralised-Autonomous-Organisation, are web-based decentralised organizations, some even without a legal registration in any jurisdiction. Hence, they are often also referred to as data- or internet-native organizations. Their rules are encoded in the smart contract on Blockchain and controlled solely by the members that are invested in them via so-called governance tokens. Already today, DAOs deploy venture funding (MetaCapital, SeedClub) or donations for business, crypto, or social purpose projects on behalf of their constituencies and manage art (maskDAO), music (MODA DAO), or projects. Within the crypto community, it is widely believed that DAOs will become major political and economic actors for governing digital and non-digital issues as well as allocating resources (also in the traditional economy).  
We are still in the early stages of the token economy, trying to understand the extent to which it will disrupt established processes. What we can be certain of is that tokens are a crucial step in the evolution of blockchain technology that will allow us to transition from speculating on extremely volatile cryptocurrencies to assuring the rapid development of the actual sector of the economy. Different uses of tokens already piqued the curiosity of investors throughout the sector in 2021, with NFTs receiving over $5 billion in venture funding [9] and DAOs accumulating $10 billion [10] in assets under management. The next few years will be pivotal for tokenomics as it continues to establish itself in the investing arena and advances to the forefront of the metaverse.  

Digital Waves makes a wide range of tokens investable. A partnership between a DeFi player and Digital Waves aims to make this asset class accessible to private investors through a partially rules-based and actively managed investment product investing in the most valuable tokens and most promising applications in the space.

Pre-register here and learn first about own and third-party product opportunities!