Token Economy

What Is a Token Economy?

In a token economy, blockchain technology is used to take physical assets, digitize them, prove their ownership, and potentially trade them. The same principles apply to tokenizing an asset that is already in digital form. 

The four tools you need to work with tokens, sometimes called digital assets, are Documentation, Tokenization, Governance, and Trading.

1. Documentation allows you to record all information about any asset and anchor its proof of authenticity on the blockchain. The timestamp, author signature, and unique fingerprint (called a hash key) immutably prove who documented what and when. 

1. Tokenization adds a quantifiable substance to a digital asset. When tokenizing a digital asset, you should choose a real-life unit of measures, such as kilograms, hours, square meters, or ounces, or you can simply use pieces, counts, etc. It could also represent a piece of art, a service, or intellectual property rights for example, and the token might quantify the number or duration of access. Tokens can then be divided into fungible (divisible) and non-fungible (not divisible) categories. The blockchain becomes the bookkeeper that records the ownership of the token or asset while enabling tokens to be safely and reliably transferred from one owner to another. 

1. Governance is what binds actions to conditions that cannot be broken. It is usually executed in the form of smart contracts on the blockchain and adds rules and restrictions to the use of tokens. In the real world, agreements between parties can be broken, which happens quite often. On programmable blockchains, smart contracts execute transfers or actions between two participants depending on the criteria or conditions of the said contract. Take tokenized equity as a simple example. Usually, there is an agreement among shareholders, and one cornerstone condition of such an agreement is that as a new party they have to sign the agreement first to become a shareholder. In a token economy, shareholders are blockchain addresses. All that is needed is to put these addresses into an approved list, called a whitelist, and create a condition to only allow transfers between parties if both parties/addresses are on that list, otherwise, the transaction will fail. 

1. The fourth feature is trading or value conversion. The biggest advantage of blockchain is the possibility to create “claims” to real values with or without backing. This feature allows you to digitize everything and have all your assets in the same form, shape, and realm. While, in the real world, trading of one physical asset with another one can be quite tricky and costly due to logistics, digital trading is easy, since it is just an exchange of claims on blockchain. From a practical perspective, one value is converted into another one. Blockchain is also perfectly suited to avoid fraud by double-spending as smart contracts can ensure that transactions cannot happen unless both parties fulfill their part of the bargain.

Token economies are essentially a digital analogy to the interaction of parties and entities in the real world, based on quantifiable units (tokens), governed by mathematics, and secured by cryptography.

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