A token is a digital asset. It is an object of value itself or representation of any other asset on a Blockchain. At the moment, the vast majority of all circulating tokens are built on the Ethereum Blockchain.
This is mainly due to the low barriers of entry and the advanced functionalities of ERC-20 tokens. At the time of writing, there are over 5300 Ethereum-based tokens in circulation.
This new way of digitizing assets can have some interesting applications in our current economy. These range from making real estate more liquid to expediting the trade of commodities.
There are several aspects that make tokens an interesting tool to form the cornerstone of a new economy. The most important features are that tokens are fast and liquid. They can be used to digitize practically any type of asset, and transacting tokens is a lot faster than moving an asset in its physical form or getting the corresponding paperwork done.
Contrary to traditional transactions, tokens also offer more transparency, by recording transactions in the Blockchain. They do so while still keeping the identity of the entities involved as anonymous as possible.
This is a very important point for a population that is starting to become more concerned about privacy and confidentiality.
Finally, in most cases, it’s a lot easier to acquire a token than to acquire the physical asset or security it represents. This is mainly due to the fact that a lot of paperwork can be avoided, and that buyers have the option to purchase only a fraction of an asset.
Generally speaking, tokens can be categorized into two main segments: Utility tokens and tokenized assets.
Utility tokens are used for a particular functionality in a DApp. Some of the ways in which utility tokens are applied nowadays are for governance, staking mechanisms and in-DApp currencies.
These tokens are not tied to any particular asset and their value derives from network effects. An example of a utility token would be the Golem Network Token (GNT), which is used as a currency to buy computing power on the Golem platform.
Applying a token model especially makes sense in industries where a lot of paperwork is involved, or where the assets are rather illiquid or have an elevated price tag. The real estate, collectibles and commodities markets could be fundamentally disrupted with the introduction of tokens.
However, before we can make a transition towards a world with tokenized assets, there needs to be proper infrastructure in place.
Where are we now and what are the next steps?
We are still at the very beginning of the transition to a tokenized economy. The current situation can be compared to the Internet boom in the late 90s. At that time, nobody really knew what the Internet might become one day, so a lot of experimentation and speculation was taking place.
For now, Blockchain-based tokens are only used by a tiny fraction of the population and regulators are still trying to figure out their legal implications. As soon as tokens become easier to acquire and store, and there’s proper regulation in place, we might witness an unprecedented shift in our current economic model.