Buzzwords blockchain, tokenization and their most important innovations explained
After the emergence of Web 2.0, we are now entering the next stage implementing Web 3.0 literally into our (digital) wallets. Blockchain is becoming increasingly relevant, which will disrupt amongst others the areas of finance, health, energy, industry 4.0, mobility, and logistics. Due to its wide-ranging use cases, the adoption of the technology is growing rapidly. The blockchain space is developing very dynamically and companies should take it seriously. Features such as smart contracts and subsequently tokenization deliver applicable adoption solutions. With the initiation of the TVTG (Liechtenstein Token Act), Liechtenstein has positioned itself in the front seat of providing a safe haven for tokenized entities. Now pioneers like Amazing Blocks AG take advantage of this incredible opportunity and offer tokenization of assets as a service.
— Author: Nicolas Weber
Blockchain 101
Simply put, a blockchain is a distributed, decentralized database implementing Distributed Ledger Technology (DLT). The copies of these databases are stored on a large number of servers. A single update on one server (called Node) results in simultaneous updates of the data on all nodes. Transactions in blockchain-based platforms cannot be changed afterwards and are partially transparent. Tokens can now be linked to these, mostly as digital representations of valuables, money, or securities. Transactions are transferred and updated virtually in real-time, and all processes are automated and standardized via smart contracts. Objects of value are recorded in an unchangeable data structure and managed by an algorithm based on cryptographic mechanisms. This allows numerous points of friction in today’s economy to be counteracted preventively.
With benefits like decentralized data storage and transmission, even governance can be handled through a Decentralized Autonomous Organization (DAO). The democratic voting system within the platform backed by a blockchain is in place and controlled by the participants (e.g. token holders). Here for instance tokens will embody votes. This and the 24/7 remote tradability can attract a larger number of primarily retail and institutional investors who can instantly purchase, trade, and govern the ownership rights acquired. While the crypto market has experienced a lot of volatility, the actual growth is steady. This becomes evident when looking at wallet users worldwide, who increased from below 10 million in Q3 2016 to slightly above 50 million in Q2 2020, as illustrated in Figure 1 below.
Furthermore, transactions cannot be censored and paired with the beforehand mentioned transparency thus enabling efficient value transmission. Security operators of networks are in place verifying transactions (e.g. incentive of miners/stackers). Additionally, anti-spam prevention is performed by required minimum value pegged to each transaction (e.g. gas fees). Nevertheless, these are only fractions of what one would pay with traditional instruments. This prevents systems from being hacked. Tokens can inherit the role of a finance and investment tool. The automated and verified systems with the continuation of payments could be further applied for pay-per-use transactions (e.g. for Industrialized Capital Goods). Data in blockchain systems is transferred and updated in real-time and all processes are automated and standardized. Parameters are recorded in an unchangeable data structure and managed by an algorithm based on cryptographic mechanisms. Ultimately, a dynamic ecosystem with diverse use cases is established.
Smart contracts explained
Smart contracts are often considered to be the most substantial innovation of blockchain technology. Jeff Garzik, the owner of blockchain services Bloq, described smart contracts as follows: “Smart contracts guarantee a very, very specific set of results. There is never confussion and there is never the need for litigation”. A smart contract is a computer protocol designed to digitally facilitate, verify or enforce the negotiation or fulfillment of a contract, they enable the execution of verified transactions without third parties involved (peer-to-peer). Smart contracts are small executable programs that can automate cash flows, e.g. credit processes, leasing, or trust processes. These efficient programs can digitally enforce the fulfillment of a contract and they enable the execution of verified “peer to peer” transactions without intermediaries. The result is automation, trust, security, speed, savings and precision. They also help to transfer money, securities and other valuables transparently and without conflict.
The term smart contracts was first used in 1997 by the US-American computer scientist and lawyer Nick Szabo. His idea is to digitize contracts and map them as a software. Thus, the service, as well as the consideration, should be specified by the software and the program logic. The approach of the idea can be compared with the goal of blockchain because the abandonment of the human component in the execution of contracts is supposed to minimize risks, errors and reduce transaction costs. In addition, the trust is to be strengthened, since the human contract partners do not have to trust each other anymore. However, now they only have to trust the software in the proper functioning of the program logic. They help to exchange money, property, shares or anything of value in a transparent and conflict-free manner. They were introduced to a broader spectrum by the “supercomputer” Ethereum, whose blockchain smoothly integrated these innovations.
Vitalik Buterin, the 22-year-old head of Ethereum, explained it at a DC Blockchain summit: “In a smart contract, an asset or currency is transferred into a program and the program executes this code and automatically validates a condition and automatically determines whether the asset should go to one person or back to the other person, or whether it should be returned immediately to the person who sent it, or a combination of both”. The following example may help at understanding: Suppose an apartment is rented via blockchain by paying in crypto currency. One receives a receipt, which is included in the virtual contract; one gives the digital access key, which is sent by a certain date. If the key does not arrive on time, the blockchain will release a refund. If I send the key before the rental date, the function will hold it and release both the fee and the key when the date arrives. This enables a trustless ecosystem with guaranteed verification for all participants.
Result: Tokenization of assets and company shares
Why is tokenization needed? If we look at the contemporary world of legal entities, the following pain points crystallize themselves: High friction through many intermediaries (e.g. lawyers, notaries) involved, time and paper consuming processes, bureaucracy and opportunity costs, onboarding of global investors tends to be difficult and last but not least a low degree of innovation.
In order to fully understand tokenization, we have to first go back to the development of so-called “dApps” on the Ethereum (ETH) blockchain. They are on top of the ETH system and their functionality can be compared to that of smartphones: The cell phone itself or the operating system (iOS, Android) is Ethereum and conversely installed apps like WhatsApp the respective “dApps”. Within these “dApps”,Ethereum-compatible ERC20 tokens can be issued. The spectrum of application areas and industries is inexhaustibly large for them. Within the Ethereum universe, there is the “native-coin” ETH on the one hand and “dApp ‘’ specific tokens on the other hand. They subsequently take over certain functions in their respective subsystems.
This is where tokenization becomes relevant, allowing users to create a digital identity for entities of any kind. The entity is “packaged” into a token with all legal and financial aspects by the so-called Token Container Model. Accordingly, all advantages of ERC20 tokens are integrated. The token acts here as a digital share of a special purpose vehicle (SPV) whilst inheriting all associated rights. However, an everlasting dilemma is prevailing: The “Tokenomy” (Token Economy) has been very unregulated up to now and there are, if at all, only rough legal guidelines that hardly provide investors with the necessary security. Hence the all-encompassing TVTG (Liechtenstein Token Act) can be considered a first mover attempt, which enables the completely legal tokenization and subsequent administration and disposition of entities in Liechtenstein with EU validity.
Based on smart contracts, the so-called tokenization will be the basis for new business models. With the Token Container Model (TCM), the small state of Liechtenstein has created an ideal explanatory approach for this. Within this framework, a token is to be understood as a “technical container” with the ability to hold rights of all kinds. The container can be “packaged” with a right that represents a real asset such as real estate, shares, bonds, gold, access rights or money. This approach to packaging a right or asset into a container (i.e. a token) may sound trivial, but it allows a separation of (1) the right and the asset on the one hand and (2) the token, which technically “runs” on a blockchain-based system, on the other hand. In this way, a distinction is made between (1) right and (2) technology. This tokenization leads to numerous advantages. Tokenization creates the basis for the digital financing and investment economy of the future. The gradually growing fusion of technology and finance is thus driven forward. Companies like Amazing Blocks offer a software-as-a-service that enables you to establish and administer a legal entity nearly entirely remotely on your computer. Even highly illiquid and non-technical sectors like that of art find their role in the interoperable ecosystem, as can be seen in Figure 2 below.
Future outlook and conclusion
Many sectors will feel the perks of integrating blockchain throughout the next years. According to the World Economic Forum, by 2027 around 8 trillion US-Dollars will be stored in blockchain networks. However, this still seems like a pretty low number, when comparing it for instance to the global real estate market, which alone is worth more today (investment sector here worth approximately 10 trillion US-Dollars. This evidently stresses the enormous potential beyond 2027. Hidden gems and overlooked projects could be efficiently utilized through Amazing Blocks for enabling instant and completely remote investment or financing options. In an utopian future, all entities tokenized here will gain in overall value — a win win for investors and issuers alike. Amazing Blocks f enables the simple application of this complex and very advanced technology and thus mainstream adoption is just around the corner.
Remarks
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Amazing Blocks offers a tokenization solution that enables its clients to tokenize various assets according to the Liechtenstein Token Act (software-as-a-service). The software covers both the issuance of tokens and investing in tokens. It suits the needs for tokenizing all kinds of assets (e.g. machines, cash flow generating contracts, trademarks, real estate, cars). Imagine that some asset should be tokenized. For this asset various tokens would make sense: Equity tokens, debt tokens, participation rights as tokens, ownership tokens, or any mixture of these tokens. The software of Amazing Blocks helps issuers to handle multiple assets and to issue multiple tokens for these assets. This is possible by integrating blockchain technology with the law (that is, the Liechtenstein Token Act). At the core, there is the “digital legal entity in Liechtenstein” based on “tokenized shares” which allows a very efficient foundation, a very efficient operation of the company and, thus, an efficient and flexible possibility to tokenize assets. This should now make a wide variety of tokenization projects possible, because the costs for tokenization are significantly reduced.
Interested? Then, contact us! Are you interested in what Amazing Blocks is doing? Visit our website, write an email to hi@amazing-blocks.io, or follow us on LinkedIn or Twitter. Or provide your email address here and we will immediately send you more information.
Author
Nicolas Weber is Head of Business Development at Amazing Blocks and your direct contact for any regards. You can contact him via email or connect with him on LinkedIn.
References
Sandner, P., Nägele, T., Gross, J. (2019, October 7). Liechtenstein Blockchain Act: How can nearly any right and therefore any asset be tokenized based on the Token Container Model?. Retrieved from:
Dünser, Dr. Thomas: The Liechtenstein Blockchain-Act (2019, March 3), Government Principality of Liechtenstein
Carson, B.; Romanelli, G.; Zhumaev, A.; Walsh, P. Blockchain beyond the hype: What is the strategic business value? McKinsey & Company.
“Bericht und Antrag der Regierung an den Landtag des Fürstentums Liechtenstein”, Nr 54 2019, Betreffend: Die Schaffung eines Gesetzes über Token und VT-Dienstleister und die Abänderung weiterer Gesetze
The Era of Tokenization” (2018). Report by Finoa
Cryptoasset Market Coverage Initiation Valuation (August 2018). The Satis Group Report.
“The tokenization of assets is disrupting the financial industry. Are you ready?” (2019). Deloitte
