More than “just” crypto: What opportunities does the token economy offer?

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What is token economy?

The token economy is a new form of economic activity. It is based on blockchain or distributed ledger technology (DLT), which makes it possible to represent all conceivable values, rights and obligations with so-called tokens. These can be understood as “digital certificates” that attest to values ​​while making them counterfeit and tradable.

Tokens therefore have the potential to make financial processes more efficient and transparent. The main tokens and their uses are:

Utility tokens represent some benefit or value. For example, they provide access to certain services or products, such as tickets, coupons or special services. Companies offer them to generate interest in their products or to facilitate user access to blockchain-based applications. Unlike security tokens, utility tokens are not considered an investment opportunity as they do not actually acquire property rights.

Investment (or collateral) tokens are linked to ownership of real assets. Each investment token represents a digital share of a marketable asset. This can be real estate, diamonds, classic cars, works of art or other valuables. The investment tokens and their transactions are stored in the blockchain and assigned to the owner.

Equity tokens are a variant of securities, which, however, are always associated with the allotment of shares in the underlying company and voting rights. Equity tokens are therefore considered the digital equivalent of equities.

Payment tokens are digital currencies such as Bitcoin, which can be used as an alternative means of payment.

NFT are non-exchangeable, non-divisible and unique tokens that represent a tangible asset on the blockchain. Non-fungible tokens are particularly popular in the art and music world and Metaverse, but are also increasingly used by other sectors and industries. For example, as proof of originality and origin of medicines, documents or machine parts.

Both physical and intangible goods and assets can be “poured” into tokens. The scope of the token economy is similarly broad. Take the capital market as an example: In recent years, several crypto exchanges and FinTech companies have emerged that promote DeFi (Decentralized Finance) and the digitalization and liberalization of the financial markets. Tokenization speeds up processes, makes intermediaries redundant, reduces costs and addresses new user groups. A win-win situation for the affected customers and companies.

Logistics and supply chain management are also suitable applications for the token economy. For example, tokens can be used to address, simplify and expedite customs issues and the processing processes involved. The energy sector can also benefit from tokenisation, for example by enabling direct trade between energy producers and consumers represented in tokens.

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What are the risks and challenges of blockchain technology?

Despite the many benefits that the token economy could offer all participants in the value chain in many industries, there are still major challenges ahead. For example, the regulation of tokens.

Regulators in different countries have different approaches to categorizing cryptocurrencies and tokens. Therefore, regulators around the world working towards consolidation and coordination at a global level are key drivers for the growth of the token economy.

Another obstacle that became apparent in the BMWK study “Fachdialog Blockchain” is the lack of knowledge about the token economy and the lack of developer know-how. Interested companies often have to build this very specific knowledge themselves. This is a challenge, especially for small and medium-sized enterprises. In addition, there is a lack of standards across platforms and clear, regulatory framework conditions.

Therefore, the federal government set itself the goal of supporting the token economy, exploiting the potential of blockchain technology, and mobilizing its potential for digital transformation in 2019 with the “blockchain strategy.” The strategy paper contains the following priorities: promoting innovations, initiating investments, guaranteeing IT security and data protection, and involving stakeholders. Improvements in these areas should make Germany an attractive place for developing blockchain applications and investing in their scaling. At the same time, companies, SMEs and start – ups, as well as the public sector, countries, organizations and citizens, will be empowered to make informed decisions about the use of symbolic structures.

How can companies and customers benefit from the token economy?

The experts interviewed as part of the “Blockchain Specialist Dialogue” agree that those areas where the exclusion of intermediaries and / or asset transactions play a particular role may benefit from the token economy. In this context, symbolic applications for fractional ownership could be particularly interesting. Simply put, young, visionary companies use investment symbols to enable the distribution of a property among many investors without intermediaries such as banks, notaries or brokers. For example, real estate financing or real estate investments via digital stocks can be implemented easily, cheaply and also for small investors. Collaboration with FinTechs, which are usually agile, have short decision-making processes and have the necessary technical and regulatory know-how, provide opportunities to implement the token economy in the field of digitized assets.

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