Last week, I published “Why You’re the Only One Who Cares About Bitcoin and Cryptocurrency,” the first in a series of articles that will explore how we talk to others about crypto. With each new article, I’ll share some reflections about how to build bridges between crypto and “the mainstream” based on my views and my conversations with others in this space.
Rather than inundate you with the same type of content week after week, I’ll space those posts out over the coming months. Send me your thoughts!
Today’s post covers a key aspect of cryptocurrency that nobody really talks about.
The real power of cryptocurrency
I have the privilege of being a member of the Government Blockchain Association.
GBA advocates for laws, regulations, and usage of blockchain technology to improve governance and the delivery of public goods and services.
While I enjoy writing about bitcoin and altcoins, I really enjoy thinking and talking about how to use cryptocurrency.
In fact, I wrote Consensusland because I found very little literature that shows people how a country could use cryptocurrency for good.
Working with GBA, I get to step back and look at the bigger picture. Really dig into the practical benefits of crypto.
While many people point to decentralization and permissionless networks as the best part of crypto, the real power comes from the use of tokens to exchange things.
Old concept, new form
Tokenization is not new.
According to many historians, people have used tokens forever. We’ve used shells, coins, points, stickers, and all sorts of real items to represent things that we can’t see. For example, wealth, authority, and accomplishments.
Some economists and anthropologists think tokenization is how we got money in the first place.
Across many societies and throughout history, priests, kings, and city administrators used tokens to reward people for goods brought for sacrifice, tribute, or distribution to workers.
Scribes would record the items, their owner, and their destination. They’d also use tokens to account for all the “stuff” coming in (they didn’t have spreadsheets back then).
In some places, they used metal coins. In other places, they wove beads into fabrics. Sometimes, they used jewels, shells, stones, small axe heads, and other items.
Authorities would use pretty much anything that they could fashion into standard units. As long as people found the tokens meaningful, they used them.
Standardization is key
Since each token had the same value, authorities could set uniform weights and measures. E.g., 1 silver coin for each barrel of wine, 2 silver coins for each bushel of wheat.
Each token had an equal value and everybody knew who it belonged to.
As a result, people could use the tokens outside the temples and courts. And they did.
Merchants used them to settle contracts and negotiate prices. Workers accepted them as payment for services. Lenders collected them as collateral and reserves.
Some noticed that a silver coin in one town could buy twice as much as it could in another town. They started bartering the tokens for goods—selling goods for tokens in the higher-cost towns, then selling the tokens for goods in the lower-cost towns.
Others discovered different groups of people preferred one type of token to another—leading them to barter and trade foreign currencies (e.g., gold for pelts).
Over time, this led to other financial innovations like arbitrage, taxes, bookkeeping, seigniorage, and credit.
Tokens themselves evolved into many forms, including cash.
But tokens have limitations
While tokens are really useful, they have drawbacks.
For example, you usually can’t split them into very small units. Storing them isn’t always easy, and what happens if you lose them? Sometimes, their value changes or they go out of circulation. Other times, people don’t accept them—after all, you can’t use Ghanaian cedis at your local grocery store.
(Unless you live in Ghana.)
On top of that, you need some shared authority to guarantee others that your tokens are real and that you have permission to use them. Often, you need a trustworthy intermediary to deliver your tokens to another person.
Sometimes, that “somebody” charges fees, defrauds you, lies to you, steals from you, colludes against you, takes your sensitive personal information, loses your stuff, or arbitrarily changes the terms of your transaction.
And, at the end of the day, you don’t control your tokens. Somebody else decides how much they’re worth, what they’re made of, and who can have them.
People have found many ways to solve this problem: governments, settlement houses, clearinghouses, laws, courts, accountants, contracts, and many other innovations.
All entail some risk, cost, complexity, and the chance of human error. All can be corrupted. None can be scaled. It’s hard and expensive to create any uniformity or standardization of output.
Cryptocurrency eliminates these problems.
With cryptocurrency, you can program tokens to ensure everybody follows the same rules. Blockchain guarantees transactions will go through exactly as you intend, with none of the risks noted above. Math assures you all tokens have the same value.
You no longer need to rely on government decrees, local regulations, or the good faith of strangers. Blockchain does that for you, with cryptocurrency to settle the deal.
You can safely transact with millions of people who you have never met, with whom you have no relationship, who live in a country with different laws and regulations. You can create huge, global marketplaces or tiny, local microeconomies.
You control everything you have
Using cryptocurrency, you can record anything on a blockchain, secure it for posterity, and send it to anybody. Literally anything—shoes, houses, instructions, pets, wagers, financial assets…anything.
Nobody can tamper with those records.
Once you program that data into a token, you can preserve and track ownership with mathematical precision. Blockchain ensures global transparency without sacrificing privacy. Each token captures all your rights and privileges. A private key ensures only you have access to your tokens.
You can divide your tokens into tiny amounts and give them to others. Or combine a bunch of tokens into a new financial product. Or stash them in a private wallet for posterity.
You can do whatever you want. That crypto is yours. Not an IOU or certificate, but verifiable proof of ownership.
No disputes, mathematically assured, uncensorable.
Verify, don’t trust.
In time, smart contracts will let you divide those tokens into secured claims and pass them down to your children. Legal frameworks will allow you to delegate roles and permissions digitally, just like you already do with paper forms and contracts. Micropayments will help people enter the market even if they have little money or influence.
For the first time, you can create financial networks where everybody can participate.
Not a way to make money, just a way to exchange things
Does this idea clash with the “price go up” vision of crypto?
People won’t use tokens if they think they’re going to be worth more in the future. Instead, they’ll hoard them.
But you can design away those flaws. Tokens need not have intrinsic value or any expectation that they’ll go up in price.
In fact, in many cases, it’s better if they don’t. Consider the electricity markets.
The world wastes hundreds of billions of dollars worth of energy. Some places produce more than they need while other places face chronic shortages.
Without getting too technical, this happens because you have layers of middlemen and intermediaries to make the power grids function properly. They calculate load, balance distribution, streamline regulations across jurisdictions, service customers, and do all sort of valuable things.
Sometimes they’re incompetent or corrupt. Sometimes they just fail, despite their best intentions. Often, they dictate terms based on what’s best for themselves, not the people they serve.
And they all charge for their services.
But, since they control the supply and delivery of electricity, you have to accept them.
Enter the token
What would happen if you represented each unit of electricity with a token and recorded it on a blockchain? With smart contracts or APIs, you could program specific rules for when electricity moves and on what terms.
Once you digitize the data, homes and businesses can get a read-out of their consumption at any moment. Inventors can create machines or programs to cycle power on or off among appliances in a single location or across the network. Utility companies can collect usage data for system upgrades and improvements.
That electricity token would represent ownership of electrical power or a right to use it. You could buy, sell, and swap tokens as needed to keep the lights on. You could embed carbon credits or certifications into each transaction.
(Meanwhile, the electrical company could get to “mint” new tokens each time it transmits power to users, preserving its revenue stream. After each unit of electricity gets consumed, an equivalent amount of tokens gets burned.)
You can cut out layers of middlemen and let the market sort everything out while making it easier for people to get electricity and obey local regulations.
While this specific idea comes purely from my imagination, it’s based on several projects experimenting with similar concepts in different ways.
Some of these projects use their own cryptocurrency while some peg their tokens to local currency. For others, the tokens have no financial value—they simply keep track of how much stuff each person has.
While this example only applies to electricity, the idea of tokenization goes beyond that.
For example, the World Bank issues some bonds on a blockchain. JP Morgan and IBM use blockchain to move their clients’ assets. Several real estate projects have issued equity and secured land records with blockchain technology. Abu Dhabi plans to put everything on blockchain.
One step closer to a fully-tokenized economy.
A glimpse into the future
Over the next year, I hope to highlight some ways tokenized economies can unlock real-world value and possibly revolutionize whole industries using cryptocurrency.
If you have a project you’d like me to mention, please contact me on Twitter @mkhelfman or email@example.com. I’d love to hear about it and possibly collaborate. I may even mention it one of my posts.
To those who’ve already connected with me about the projects they’re working on, thank you for your time. It’s fascinating to hear about all the amazing things going on in this space.
Relax and enjoy the ride!
Mark Helfman is a top writer on Medium for cryptocurrency, finance, and bitcoin topics. His book, Consensusland, explores the social, cultural, and business challenges of a fictional country that runs on cryptocurrency. In a past life, he worked for U.S. House Speaker Nancy Pelosi.
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