While the blockchain itself provides the technological constructs to facilitate exchange, ownership, and trust in the network, it is in the digitization of items of value that tokenization of assets is essential. Tokenization is the process of converting the assets and rights of a property into a digital representation, or token, on a blockchain network.
It is important to distinguish between cryptocurrency and tokenized assets to understand the vehicles of exchange, valuation models and fungibility across the different value networks that emerge and pose interoperability issues. These are not only technical challenges, but also business challenges related to fair swaps.
Tokenization of assets can lead to the creation of a business model that fuels fractional ownership, the ability to own an instance of a large asset. In discussing asset tokenization in a previous article, I also mentioned the value of an instance economy in democratizing global finance, trade and access, as well as creating a larger global market on a scale never seen before.
With digital assets and their fungibility in a blockchain ecosystem, there are different valuation drivers. These include: 1) tokens based on crypto business models that are driven by supply and demand, and network utility; 2) non-fungible tokens, or NFTs, which have intrinsic value such as identification, diplomas and health records – essentially, tokens which are mere validations of proof of existence, authenticity and ownership of digital assets; and 3) fungible tokens which are valued on various bases, such as total sum of economic activity in the network (cryptocurrency), its utility (smart contracts and transaction network processing), assigned values (coins stable and security tokens), etc. at.
In this article, I tackle the complex question of the hyperbolic and rapid rise of NFTs, after an equally meteoric rise in decentralized finance, or DeFi, creating amazing innovations – with immense promise of democratization, new business models and global markets with global access – all fueled by the core principle of decentralization and the fundamental constructs of tokenization and wallets. While NFTs can be characterized as one-of-a-kind crypto tokens with some intrinsic value to a holder or to a market (art, collectibles), the NFT movement is a sign of a larger token revolution that is taking place. Not only will fuel massive innovation and growth in Web 3.0 protocols but also test the resolution of the DeFi movement, as well as its ability to intersect and provide platforms and a vehicle of exchange for all types of tokens.
Growth of Web 3.0 protocols
The first two generations of web protocols were largely about delivering information and connecting people. They have fueled massive growth in information and collaboration, and have done wonders in connecting the world. However, these web protocols were never designed to move valuables. Additionally, as the Web 2.0 era reached its full potential, vulnerabilities such as “fake news” and “cluster relay” of the movement of assets through a series of middlemen have emerged. Threats to the system’s business and financial infrastructure risk destabilizing it.
Web 3.0 promises to protect everything we value: information, truth, and digital assets – both fungible and non-fungible. While Web 2.0 has been driven by the advent of social, mobile and cloud, Web 3.0 relies heavily on three new layers of technological innovation: advanced computing, decentralized data networks and ‘artificial intelligence.
The growth of NFTs has not only enabled artists, skilled professionals and entrepreneurs to encapsulate innovation in symbolic form, but has also fueled the democratization of the platform as one of the promises of blockchain technology. The underlying infrastructure includes decentralized storage technologies, efficient consensus protocols, off-chain computing, and Oracle networks to provide connectivity and validation to existing systems.
Collectively, the Web 3.0 technology set envisions a connected, trustless, and accountable network to efficiently deliver value, thereby creating an infrastructure for things of value. NFTs represent both transferable entities and non-transferable tokens which we value. These include things like our identification, health records and passports, things that represent us and allow us to participate in the digital economy with our own unique digital identities.
As we dare to envision a shift to a world with decentralized control, governance based on distributed technology that challenges all business models, and a governance structure based on centralized business frameworks, there are a few things we need to think about. Not only the change itself, but also the motivators, incentives and monetization elements that fuel and enable economic infrastructure to move things that have value – thus following our changing perception and subsequent achievement. of this value.
Intersection with finance – DeFi
DeFi is the movement in the blockchain application space that takes advantage of decentralized network technology to disrupt and force the transformation of old financial products into transparent and trustless protocols, facilitating digital value creation and dissemination with little or no no middlemen. It is widely understood and accepted that – due to new synergies and co-creation through new digital interactions and value exchange mechanisms – blockchain technology lays the foundation for a trusted digital transactional network which, in as a disintermediated platform, fuels the growth of markets and secondary markets.
As DeFi aims to deliver on the promise of democratizing finance, NFTs are testing DeFi’s resolution by offering a competitive but inclusive asset class, as well as ways to provide a medium of exchange, fungibility by other fungible asset classes and liquidity in a traditionally illiquid market.
Asset classes resulting from DeFi protocols and NFTs reap the benefits of fractional asset ownership, blurring the lines between asset classes and using constructs like digital wallets as a receptacle for them. All of this is supported by the underlying layers of Web 3.0 which provide security and availability through decentralization, as well as trust and immutability through consensus, extending these principles to basic IT infrastructure like the storage and interconnection.
The commercialization of Web 3.0 protocols, which manifest in the form of fungible utility tokens, further blurs the lines with various financial innovation products introduced by DeFi (such as core assets and derivatives) that are also tokenized. . So while decentralization is the underlying theme – and the wallet and token are fundamental constructs – those blurry lines run pretty deep.
This article does not contain any investment advice or recommendations. Every investment and trading move involves risk and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of UKTN.
Nitin Gaur is the founder and director of IBM Digital Asset Labs, where he develops industry standards and use cases and works to make blockchain for the enterprise a reality. Previously, he was CTO of IBM World Wire and IBM Mobile Payments and Enterprise Mobile Solutions, and he founded IBM Blockchain Labs where he led the effort to establish the practice of blockchain for the business. Nitin is also a Distinguished IBM Engineer and IBM Master Inventor with a rich portfolio of patents. In addition, he is a research fellow and portfolio manager for Portal Asset Management, a multi-manager fund specializing in digital assets and DeFi investment strategies.