In the previous post, we discussed the unique ability for blockchains to tokenise assets, having the power to combine the best properties of physical assets (unable to be copied), with the best properties of digital assets (easily transferrable).
But with a little bit of imagination, we can do far more with blockchains.
Representing anything of value
While blockchains can be good for tokenising existing assets, such as real estate or company shares, they can also be applied to tokenising new forms of value. Indeed, blockchains can represent anything of value, and via a token, it is made available for trade and programmatic control. Let's take a look at the two most high profile blockchain projects, Bitcoin and Ethereum, in an attempt to understand the value their token represents.
Bitcoin is interesting from the perspective that it's not "backed" by anything we would traditionally consider. In fact, it's not backed by anything at all, and yet it has value. This is very interesting! Where does its value come from?!
Bitcoin is a network for value transfer, one where your bitcoin address is decoupled from your true identity, and where the monetary policy is known, fixed and incorruptible. Bitcoin's value is derived from being able to access an easy, global store of value. Like gold, but a lot easier to use. Gold derives its value from being scarce and physically attractive, useful for being made into fine jewellery. It's also highly conductive, making it very useful for electronics, as well as being highly stable and chemically inert, which historically has made it very useful as a store of value because it doesn't oxidise or otherwise spontaneously degrade. Bitcoin however doesn't share any of this intrinsic physical value; it is only (i) scarce and (ii) a good way to store value. And that's what makes it interesting. Bitcoin was the first blockchain with this property and so now also enjoys the value of the largest and most mature network effect of its kind.
Ethereum develops value quite differently. It's a general purpose blockchain (shared data) that has been coupled with a general purpose programming language (shared logic), and so it carries utilitarian value due to its ability to run smart contracts (more on these in later posts). We can liken Ethereum to a brand new smartphone out of the box. By itself, not immediately very useful. You might be able to use it as a hammer, or a doorstop, but without useful software you may as well melt it down and sell the raw materials. Smartphones only become useful because of the useful software that is installed on top of the hardware. You can install a sim card and make calls, install a memory card and take and save photos, install a note-taking program and take notes while reading a blog. This is a good analogy for Ethereum - it's like a raw, first generation iPhone, but one that can be upgraded over and over into the modern smartphone we have today. It all started with very few apps, poor battery life, heavy weight, and lots of room for improvement to what we've got today - faster, cleaner, more relevant, more functional, more beautiful.
And so because the smartphone has this utility in providing a trustless platform for software (apps), it has value. Ethereum, and by proxy its token, 'ether', effectively represents the value of trustless computation, and a strong developer community, because we must pay in Ether in order to run applications on Ethereum.
The ultimate point here is that given a way to develop a trusted, common understanding of data, we can now represent anything of value within that same common data fabric.
While blockchains give us the tools for representing canonical assets, it also gives us a means to access new or previously-difficult-to-unlock forms of value whenever we apply the technology to wherever illiquid or small amounts of value are trapped by old technology or processes. And now, we have the value available in a tradable and secure digital format.
So what illiquid value can we target? Here are some examples of this value unlock:
Real Estate: turning a highlly illiquid asset liquid, and a market with a high barrier to entry to one which is easy to enter and exit with improved liquidity. Currently, the closest thing the world has to tokenised real estate is a "Real Estate Investment Trust" (basically a company which owns real estate on behalf of its share holders). The liquidity and exposure to the real estate market here is the ability to buy and sell shares in that company.
Carbon: we know that this has value (or rather, negative value as we're now accounting for what has historically been an externality), but how to administer such a system? Well, we can use secure IOT devices installed in an industrial setting. These can be monitored with a narrow AI overlay as necesary to help protect against the subversion of the data seen by the blockchain-connected IOT oracle.
Space: as in, office space, advertising space. Space is uniquely describable, and can be tokenised into sub-spaces for letting, signage, installation of solar or telecommunications equipment.
In days gone by, if you walked two blocks to pick up some fresh milk from a local shopkeeper and forgot your wallet, you might have written out an IOU on a piece of paper. Communities were smaller in the past, and all participants were more well-known, and so this provided a trust fabric that ensured continued harmony. But today, as the world becomes more populated and globalised and our horizons are farther, with a blockchain not only can we enforce such scenarios in the absence of trust, but we can also interchange and trade any form of value we create. "Oh no! Sorry, I forgot my wallet...but I have my phone. Can I transfer you an equivalent amount of Gold-Credits instead?" Indeed, we may find ourselves lurching toward a future with a complex barter system before the winners in this cambrian technology explosion emerge.
Blockchains sit at the intersection of economics and computer science. As entrepreneurs and developers bring this technology into the everyday, value is set to become more liquid, and value transfer to become more efficient. We are now able to build new and more effective incentive systems, based not on the constraints of old technology and processes, but instead on more fundamental primitives, such as the principles of microeconomics, game theory, and individual and collective psychology.
Samuel Brooks is CTO of Block8: a leading distributed systems venture studio based in Sydney.