Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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Want to launch an ecosystem? Consider Tokenization
2tokens Blog | Jan 14, 2020
Tokens have been around for 1000s of years, but only recently have we seen the rise of digital tokens. Now, cryptographic tokens offer us an opportunity to redesign value streams and hence existing ecosystems. A well-designed token ecosystem unlocks value by bringing parties together in new ways and stimulates the target behaviour by having cryptographic tokens as built-in incentives. Tokens matter and offer a chance to redesign existing and new ecosystems.
On January 14, 2020, we had the second round table session organised by the 2Tokens initiative. The 2Tokens project aims to clarify the path to realising value from tokenisation. During the first round table session, we discussed why we need tokenisation, what is required to achieve value from tokenisation, and how we should move ahead with it.
Shared Understanding
Tokenisation, tokenomics and token engineering are new concepts and, for many, difficult to understand. Especially since often, these terms are used differently in different contexts. A shared understanding is not only relevant for building tokenised ecosystems, but it will also enable regulators and policymakers to address regulatory concerns in the right way. As such, it will foster a healthy public debate around tokenisation.
See: Tokenizing Assets and Unlocking Value on the Blockchain
A shared understanding consists of precise terminology and taxonomy, international standards, useful metaphors to share with wider audiences and clear legal and regulatory frameworks. Since the field of tokenisation is very much alive, on-going coordination, education and engagement among all stakeholders is essential. A Token Coalition can manage this, or organisation such as the 2Tokens project, to ensure all stakeholders' requirements are met. We define the terminology as follows:
- Tokens: the digital representation of value (e.g. asset) on a blockchain.
- Tokenisation: the process of changing value (e.g. asset) into its digital representative
- Tokenomics: the study of the emerging field of the design of crypto tokens and related digital assets using economic incentives, game theory, cryptography and computer science.
- Token engineering: the practice of using tokens as the foundation for designing value flows and ultimately economic systems
- Purpose-driven tokenisation: leveraging the exchange of value to drive behaviours of an ecosystem towards a particular goal
Innovative Funding
For any ecosystem, funding is important. Tokenisation, however, changes how this funding can be achieved, going beyond traditional financing from venture capitalists or financial institutions. When an ecosystem plans to use tokens for funding, it can benefit from easy access to capital, anywhere in the world. Compared to traditional financing such as an IPO, the costs of financing are lower, and it is easier to scale as more people have access to the investment opportunity. After all, tokens do not know borders.
See: BIGG Digital Assets Inc. to Reinvest Free Cash Flows From Operations into Bitcoin
Tokens offer multiple, technical, advantages over traditional funding. First of all, they are programmable. This means that governance and rules can be embedded within the token. For example, the longer you hold a token, the more dividend you will receive. This allows you to drive the behaviour of your investors while raising funds. In addition, tokens are transparent, secure and traceable, giving regulators more control to ensure correct behaviour.
With tokenised funding becoming the norm in the coming years, we can expect a shift from ownership to temporary ownership, as exchanging assets will become easy. As a result, previously illiquid assets will become liquid, thereby drastically changing economies. Anything can be tokenised and made liquid, including real estate (fractional ownership), CO2 rights, mobility, futures, art or even entire clubs and sport contracts to increase fan engagement.
Key to tokenised funding is the right infrastructure. This includes secondary markets to easily exchange security tokens, clear regulations so companies know what they have to comply with, and an intuitive user interface to facilitate ease of investment. When the right tools are available, tokens will revolutionise funding opportunities.
Change Management
Developing an ecosystem is one thing; getting people to use it is a different challenge. Although tokens can drive behaviour, people will need to change their behaviour to participate in tokenised ecosystems. It can be expected that there is a resistance to change because people don’t understand the new ways of interacting.
See: For Digital Assets, Private Markets Offer the Greatest Opportunities
To tackle this resistance, it is crucial for ecosystem owners to create awareness and understanding the change implied when using tokenisation; what is it, why is it important, how will it change the ecosystem and what are the benefits? In addition, it is important to take into account to define and communicate the scale of change and eliminate certain (wrong) assumptions. Starting with a minimum viable ecosystem to build engagement and showing why a tokenised approach is important can help in market adoption.
When talking about tokenisation of an ecosystem, or multiple ecosystems for that matter, we should also take into account the following subjects:
- Responsibility: define responsibility, who is responsible, what creates what and who might be responsible for possible negative consequences of the tokenisation of the ecosystem?
- Weaker parties: Weaker parties might need a helping hand to participate in the tokenisation of ecosystems.
- Ethics: is the tokenised ecosystem designed with ethics in mind?
- Skin in the game: who are the parties at risk when tokenising an ecosystem? Who can quickly adapt and who might need more help? It is important to try to keep everyone on board. Diversity within and between ecosystems could add a lot of value.
With the above components in place, it becomes easier to design and grow a tokenised ecosystem.
Tokenisation and the Law
When designing tokenised ecosystems, legal compliance is essential to stand apart from unethical and fraudulent counterparts. Therefore, legal design thinking is relevant at the core of every project.
See: Privacy laws might prove to be a blessing in disguise for crypto
It is important to have a clear view of the legal aspects of new developments to obtain regulatory cooperation and closely collaborate (for example, using sandboxes) with regulators and policymakers when designing the tokenised ecosystem. While the community should welcome regulation, regulators and policymakers need to develop regulations that do not stifle innovation. This requires more cooperation and open dialogue between those innovators and the regulators.
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