Blockchain tokenization in enterprises and beyond
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Blockchain tokens are the digital representation of complete or shared ownership in anything of value. Blockchain tokens are commonly leveraged in payments and settlements between participants. The tokens also enable representation of multi-party ownership of an indivisible asset, such as a work of art, and ease the exchange of such ownership between parties in a blockchain network. Tokenization introduces new avenues to optimize business processes involving multiple partners and bring in new business models. The IDC predicts that by 2025, the world-wide tokenized asset market will reach USD 500 billion.
Interoperability of networks and the ability to use tokens across networks and industries ushers new business models and newer ways to improve business processes. InterWork Alliance (IWA), an association of industry leaders, academics, and government is working towards developing some standards and governance framework around tokens and has introduced a taxonomy called the Token Taxonomy Framework (TTF). This taxonomy provides a common language, called token formula, to communicate a token’s properties and capabilities. TTF enables creation of standardized tokens that are platform and technology neutral, allowing the tokens to be used across blockchain networks.
The TTF broadly classifies tokens as fungible, non-fungible and hybrid, which form the basis of a token. Additional properties like mintable, transferable, burnable are specified to define behaviour and capabilities of the token.
In an enterprise setting, tokens are normally minted based on the possession or proof of possession of an asset. The number of tokens minted typically depends on the value of the asset the tokens are pegged against. Once minted, the tokens can be assigned, transferred, redeemed, used as payment, or taken on or off circulation, according to their use case.
Ethereum has defined standard token interfaces like ERC-20 for fungible tokens and ERC-721 for non-fungible tokens. Tokens built to these standards can be traded in multiple networks. At present, ERC-20 is one of the popular token models implemented in many solutions.
What tokens can bring to enterprise systems
A token-based blockchain platform enables transfer of ownership and value in the same transaction unlike traditional methods where there is considerable delay between the transaction time and the settlement.
Another major advantage provided by tokenization is value realization of intangible and illiquid assets. An intangible and/or illiquid asset can be tokenized and be made available for increased shareholding and trading in a marketplace thereby providing liquidity and value realization for partial owners.
Cash or physical assets can also be tokenized and used as intermediary currency in the settlement of other types of assets in exchanges. These asset-backed tokens, called stable coins, optimize business processes by eliminating intermediaries and escrow accounts, allowing the settlement to happen alongside the business transaction. The collateralized asset can be held and validated by external entities to increase the trustworthiness of the token. There are several gold and fiat currency-backed tokens currently in the market.
Norilsk Nickel, the world’s largest producer of palladium and high-grade nickel, has tokenized palladium and nickel assets and set up a blockchain-based platform called Atomyze, making trading easier, providing faster transaction time, and providing a permissioned view of transactions. Atomyze network includes consensus mechanism along with validators to enhance the credibility in the system. Atomyze will help transform traditional ways of how industrial companies are working with their key counterparties.
Several central banks are also pursuing the use of tokens as a form of digital currency. Commonly referred as Central Bank issued Digital Currency (CBDC), these are equivalent to and recognized as the legal fiat currency. Unlike the currently prevalent electronic cash systems like Venmo, Apple Pay, Google Pay and others, CBDC would not require a bank or credit card account, thereby allowing the unbanked to participate in electronic transactions. Though the issuance of CBDC is controlled by a central bank, the distribution of currency tokens could be decentralized. Project Aber (Saudi Central Bank and Central Bank of the U.A.E. Joint Digital Currency and Distributed Ledger Project) provided central banks with the ability to reimagine both domestic and cross-border payment systems in new ways
Loyalty and reward points have been used by businesses for a long time to incentivize and reward user behavior. A blockchain token solution for loyalty programs can bring in trust, transparency and efficiency on the interactions between different loyalty program partners and can allow the use of reward points across loyalty programs instantly.
Securitization of ill-liquid assets (like real estate and patents) using tokens can bring in liquidity of assets and enable realization of hidden value by involving a larger pool of buyers. Regulatory and tax policies with regards to securities tokens are evolving at this point. As per the U.S. Securities and Exchange Commission, token usage could come under the purview of the securities regulator if it matches one or more of the conditions mentioned under the Howey Test. The legal framework is also evolving with multiple state and local agencies changing laws to provide clarity. The U.S. Office of Comptroller of Currency (OCC) has recently issued guidelines to allow federally regulated banks to use stablecoins to conduct payments and settlements.
Tokens issued against generation and use of renewable energy could be promoted to encourage customers to use sustainable energy. Investment in a renewable energy project (such as solar farms) could also be tokenized to expand the investor pool. A tokenized system will be able to build trust and help investors with prospecting, building and operation of the project.
The technology behind blockchain tokens
Tokens are implemented using smart contracts called token contracts. The token contracts are programs that allow validation of business rules and transfer of value from one users’ wallet to another. UTXO and account-based models are widely used to implement smart contracts. The UTXO model was introduced in Bitcoin and has been the model used by many of the crypto currencies. Account-based models are used by networks that run on Ethereum and The Linux Foundation’s Hyperledger Fabric. In an account-based model, a world state database is used to maintain the current state of the asset or token at any given moment and will be used as the balance.
Platforms based on the UTXO model do not have a world state database that will have the current balance as a single record. Instead, they maintain the balance output of each transaction they have performed. The current token balance could be calculated by totaling all the unspent balances. In the UTXO model, for any transaction, the sum of the input values must be greater than or equal to the sum of outputs. R3 Corda has a robust token SDK and is based on the UTXO model. Token-based solutions can also be implemented in Hyperledger Fabric using smart contracts.
Tokenization in an enterprise blockchain-based solution presents many opportunities to increase operational efficiency. Tokens also help optimize business processes and enable new platforms with partners across industries. Use of standards-based tokens provides interoperability and wider acceptance. We see clarity from governmental and regulatory institutions regarding the use and governance of tokens and standards are also emerging and thus enabling growth of token-based platforms.
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