How Tokenizing Assets Works

The 2017 rally in Bitcoin up to $9,955 (at the time of this writing) has made many early adopters of the technology very wealthy. At this point, there's no telling how high it could go.

The nature of bitcoin, and the nascent cryptocurrency industry that bitcoin has created since its inception, can sometimes be hard to define. Some people view bitcoin as a global currency, while others view it as a store of wealth much like gold. Our belief is it’s still too early to tell what bitcoin’s primary use case will be, but what is certain is that this new field will revolutionize investments and financial instruments as a whole.

Take gold for example. This precious metal has been used to keep wealth relatively stable through times of economic uncertainty. Many crypto enthusiasts seriously believe that bitcoin, or another cryptocurrency, will replace gold as the primary store of value on the economic world stage.

However, these digital assets can be linked to physical assets such as gold, rather than replacing them. What this means is that instead of a lot of paperwork and back and forth between intermediaries, you could buy a stake in gold — real world bullion that’s in a vault somewhere — but that ownership would take the form of a digital token held in a digital wallet.

What Does This Mean?

So what’s the big deal? What’s the difference between having a gold coin in your pocket versus owning a tokenized gold coin in your digital wallet? The difference is tokenizing assets (the process of digitizing an asset by appending a digital representation of it to an immutable ledger) eliminates much of the friction involved of holding, storing, and transferring a physical asset such as gold. To illustrate this point, look at what happened on the Pacific Island of Yap.

Hundreds of years ago, Yap's inhabitants decided that they would use limestone discs the size of boulders to facilitate trade for large purchases (houses, a daughter’s dowry, etc.) As you can imagine, it was impractical to move these multi-ton discs after every transaction, so everyone agreed to leave them where they were, and just say that ownership had changed hands. Legend has it that during transport one of these discs was lost at sea, but rather than bringing it back on land (or removing it from the money supply) everyone agreed that it was still useable and that they could still trade it amongst each other. People were then trading a unit of currency that no one had physically seen in decades.

Digital tokenization of real-world assets is a somewhat similar concept. A token is created and linked with a discrete asset, such as gold bullion. Once that token exists, its owner can hold it and benefit from gold as a store of value, or they can transfer it instantly to anyone else with a digital wallet. The physical gold remains in the same place, but ownership has changed hands.

Some might be concerned about the security of these tokens. What’s to stop someone from selling a token to another person, accepting payment, and then manipulating the system to stop the token from changing hands, or spending the token a second time (referred to as “double-spending)? This is similar to a chargeback in the world of finance, which cost the e-commerce industry nearly $7 billion in 2016, and is expected to swell to $31 billion by 2020. Cryptocurrencies solve this issue by utilizing a data management system, often referred to as a “blockchain”.

For instance: data stored in bitcoin’s blockchain represents monetary value secured by Proof of Work; where data in a tokenized asset is the amount of gold (or any other asset like real estate, art, etc) attached to each token. All you’re doing when you send bitcoin, or send your tokenized gold, is transferring data from one user to another. With a blockchain, it is impossible to transfer these assets and game the end recipient; ensuring the success of your peer-to-peer transfer.

Tokens Are Here to Stay

This is the fundamental breakthrough that the creators of bitcoin discovered when they originally revealed the idea in 2008. For the first time in the digital era, data was transferrable but not infinitely replicable. This is fundamentally different from something like email, which you can send across the internet while also making as many copies as you want.

It gets very technical the more you dive into it, but suffice to say that this is a complete gamechanger for global finance and asset management. While some companies are already tokenizing assets such as gold, the sky’s the limit in terms of assets that can be managed with blockchain-style ledgers.

Kyle Forkey is the CEO of Moria, a decentralized investment platform for precious metal extraction.