The key opportunities and issues of tokenization

Distributed LabBlogThe key opportunities and issues of tokenization

Businesses who have real clients and turnover look on in, as ICO startups – with nothing more than a white paper to their name – receive plaudits, and hundreds of millions of dollars. Many people, perhaps a little tardily, decide to make an ICO out of their business. For the majority of them, it doesn’t go well.

The hype of the ICO passes – and with it go the market tokens, which had been bolted on, like a fifth wheel on a cart. However, the tokenization remains – since it could, later, offer real benefits to the firm.

Let’s take a look at the main opportunities and issues.

  1. What actually is tokenization anyhow? It’s a way of representing a particular asset (which could be a service, or a product) in the form of a digital token. Exchange of these tokens between accounts amounts to exchange of ownership rights to the asset.
  2. So, is tokenization the same as an ICO? No. Tokenization means the digitization of all the business operations and assets. ICO is a means of raising capital, and tokens issuance on a stock exchange in result.
  3. Initially it makes sense to pay attention to the processes which are already digitized in any case.
  4. Tokenizing makes sense for assets which can be traded – known as fungible assets.
  5. Your token – if it is backed up with assets – can become a security token.
  6. If you plan selling tokens in advance, you should do this when the business is already running (rather like selling subscriptions for three years).

As an example, let’s say that you have a business offering email mass mailings. The business model is called a freemium – meaning that 90% of the users get services for free, and provide business awareness, while the remaining 10% actually turn a profit for the business. Tokenization for such business case would mean:

  1. Creating an accounting system. 1 email could be valued at one token.
  2. Instead of offering users a free package worth 1000 emails each month, you could give them 1000 tokens in their wallet – which they could use to get their free services. Does this begin to resemble the basics of unconditional income?
  3. But if users find they don’t have enough tokens for their needs, they could buy extra tokens from an exchange. (The exchange need not belong to the business).
  4. Purchased tokens can be transferred between users. Unused free tokens are either non-transferable – or could be an entitlement to a discount (there are endless different imaginable scenarios here).
  5. Your internal blockchain (the accounting system) will be a record of all the transactions between your users and your business.
  6. There are also some further options – (i) you could easily set up voting for new business features, and (ii) you can easily monitor the supply and demand for the service.

So, if we take a hard look at the benefits:

  1. Increased transparency of your business operations – very valuable, if you need to improve your analytics, or demonstrate turnover to investors.
  2. You slowly wean your free users onto a pay-per-use idea.
  3. You set up a secondary market for your services (similar to the way that Amazon sells second-hand items alongside new ones).
  4. Your business is now instantly ready for a move-over to flexible pricing (auctions).
  5. You can establish an ecosystem (if you become a leader in your chosen industry).

Finally, let’s look at the take-aways from all this:

  1. Tokenization isn’t sorcery.
  2. The system belongs to you.
  3. Actual assets and services are tokenized.
  4. It shouldn’t be done over a public blockchain?
  5. Conceptually, it’s the shift-up from the paper era to the internet. Those who’ve made the transformation will win-out in the end – because your costs are going to be way lower than your competitors.

Illustration by Katerina Krashtapuk

Pavel Kravchenko
About the author

Founder & cryptographer