Davos 2023 - does tokenization solve any real-world problems?

If technologies have seasons, then the past 12 months have been a winter of sorts for digital tokens. The crypto crash, FTX fraud, big losses for many NFTs, and questions about the efficacy of some carbon offset schemes have been among the blizzards of bad publicity to hit the sector – if, indeed, it could be described as one. In some people’s minds, a cryptocurrency is, at best, a vehicle for high-risk speculation, and at worst a Ponzi scheme.

Unless attached to real-world assets – which they represent on blockchains – can digital tokens be said to have intrinsic value themselves, beyond hope or being the notional midpoints in online transactions? Aren’t some tokens merely exotic forms of native Web 3.0 stupidity – bored apes valued at tens of thousands of dollars – especially when so much energy is consumed in the production of… what exactly? 

In short, are some aspects of tokenization merely a global game of ‘find the biggest fool’ as the planet burns?

This was a hot topic for the World Economic Forum in Davos last week, in a panel featuring: Michael Casey, Chief Content Officer at news site CoinDesk; Jeremy Allaire, co-founder, Chair, and CEO of Circle Internet Financial, which issues the USDC stablecoin; Beryl Li, co-founder of Philippines-based NFT gaming outfit Yield Guild Games; ‘Topp’ Jirayut Srupsrisopa, Group CEO of the first Thai FinTech unicorn, Bitkub Capital; and – intriguingly –Timo Harakka, Finland’s Minister of Transport and Communications. He admitted to “trying to make sense of Web 3.0”, aka the Web that spits in the face of thermodynamics.

In response, Allaire set out his stall quickly and said:

Our vision was, how can we use the benefits of blockchain technology – as an open environment for transactions, immutable records, global interoperability, a lot of these advantages – to tokenize the dollar?

We're not trying to introduce a new currency to the world, we're trying to take the power of this technology and imbue that into the dollar. As I like to say, give the dollar the superpowers of the internet.

You would think that with companies like Apple, Microsoft, Amazon, and Google having market caps larger than the GDPs of most nations, the dollar is doing just fine, thank you. But in a digital world, the dollar could come under threat from whichever tokens become widely adopted, including a CBDC (central bank digital currency) like the digital yuan, perhaps.

Allaire continued:

The phrase ‘tokenizing real-world assets’ is something that people talk about a lot, and the dollar happens to be the most important real-world asset. And we've tokenized it in a regulated way. And so, it becomes a foundational building block.

The real point Allaire was making is that, while in the real or Web 2.0 worlds, money is all about old-fashioned things like being a unit of account, a medium of exchange, a store of agreed – but still mutable – value, in Web 3.0 it becomes something more modern: programmable. He added:

With blockchain technology, the fundamental innovation is that you can write code that can interact with those assets. For example, code that says ‘release this value to someone based on an event that happens’. Or ‘I want to put value into this contract, and someone else can use that value for a period of time and pay it back with an interest rate’. 

And so, you have the ability to write contracts. Programmable, composable money is a mouthful, but it is lighting up the utility value of money.

Famously, no one was able to write contracts until now or attach value to them. But joking aside, the core point is this: in Web 3.0, we can now ascribe value to things that don’t exist in the physical world. And that is exciting – perhaps. As long as we don’t forget the laws of physics. All virtual realms exist in hardware that uses energy and produces heat in the real one (unless it can be fired into space).

That aside, this extension of value is most familiar to the world’s estimated 3.1 billion gamers, who, in environments like Roblox, World of Warcraft, and more, can trade in virtual assets, with any in-game rewards (potentially) turned back into real ones. With players spending an average of 14% of their waking hours in virtual worlds and esports – according to Yield Guild Games’ Beryl Li – that economy cannot be dismissed as illusory.

Chairing the discussion, Casey was philosophical. He said: 

We can call it real or not, but that is a huge chunk of the digital economy right there. And the fact that we're now translating and shifting some of the value away from just the gaming companies means there's a transfer of real wealth through tokenization. That is a very interesting model.

It is. He added:

I find it fascinating to think about where we could go. Not just with games, but things like AI research, where we're all participating in the digitization of information and somehow being rewarded, rather than just passively having our data extracted.

Put another way, in Web 1.0 and 2.0, humans happily gave away their data to world-straddling tech behemoths in return for little more than intrusive advertising. But in Web 3.0, its innovators believe they can seize back control and pass it to decentralized participants. And so do some countries, who resent the power of the US, China, and their respective real-world currencies.

Don’t forget, digital data itself has no meaningful physical existence, yet is arguably the world’s dominant currency beyond the dollar. The difference is people are slowly waking up to the fact that they have simply handed that data to Google, Amazon, Meta, Apple, et al., who, spookily, also have all the dollars.

Digital scarcity 

However, Web 3.0’s token-focused innovators should be careful about making bold claims of owning this debate, as it applies just as much to the Web 1.0 and 2.0 worlds as it does to their wannabe descendant. The likes of Sir Tim Berners-Lee and others have long been looking for ways to hand control over personally identifiable information back to data subjects. But on the whole, its subjects don’t seem interested.

So, what further utility might tokenization have, beyond expending vast amounts of energy, in some cases, to decentralize imaginary things? Bitkub Capital’s ‘Topp’ Srupsrisopa made some bold claims from the get-go. They said: 

We fully conquered Thailand. Thailand is a small country, but we are quite advanced in terms of blockchain applications and use cases. 

For example, the Thai central bank’s governor was here at Davos last year talking about the CBDC. It was going to be launched in Q4 last year, but it got delayed to Q1 this year. We're going to start with a wholesale, not retail, CBDC.

We're also planning to issue an investment token, which is a separate licence from a crypto token. Traditional finance can now tokenize all kinds of values. Government bonds, carbon credit trading, foreign exchange, electricity units...

Then he added a credo for the Web 3.0 age and said: 

Blockchain technology creates digital scarcity, versus the internet which creates digital abundance. 

For the first time in humanity, we are we are able to achieve digital scarcity. Tokenization is a digital representation of value, meaning that we can upload any kind of values into the digital economy, so tokenization will be the underlying foundation of the digital economy going forward.

This is a valid, if debatable point. In the physical realm, scarcity – diamonds, gold, rare earth, oil, talent, beauty – tends to equal value. So, in theory, digital scarcity ought to equal value too in its virtual counterpart. But to date, it has largely created an economy built on absurdity: jpegs of apes worth more than sports cars, or mega-wealthy speculators chasing obscure tokens in the hope they might see exponential rises in value if they tweet about them. (Sound familiar?)

The flaw, then, is obvious: digital scarcity can only attain real-world value in a realm of networked noise. Put another way, if the foundation of the digital world is the network, then – if innovators are to be believed – value can largely be attained by walling off the asset. A bit like land in a feudal nation, in fact.

A question of trust

This brave new world is not without its problems, Srupsrisopa acknowledged. But, for some reason, appeared to consider innovator accountability as the biggest. He said:

Last year was tough year with FTX, with unregulated players messing the space up. But it’s the regulated players that are being punished. For example, in June this year, there'll be new capital requirements on top of our customers’ deposits. We have $2 billion worth of customers’ deposits right now and we keep 10% on the hot wallet. It’s dollar to dollar one to one, but we have to have an additional $200 million of our own cash on top.

Financial probity and stability, post 2008-09? Asking financial institutions to be responsible and to have real assets and liquidity rather than imaginary ones? Outrageous! 

So, what do governments make of all this? Finland’s Harakka said:

We are eagerly waiting for the EU’s views and recommendations on Web 3.0. But a basic problem is that none of these tokenized or crypto actors want to have national regulation. 

We need to have clarity. Three issues concern politicians. First, if I meet voters and start talking about tokens and crypto, they say it's a scam. So, there is a case to be made. You need to convince people that there really is utility. 

So, transparency, ironically, is issue number one because you're supposed to have that transparency with blockchain. But what all these scandals have done is reveal the lack of transparency!

Second, is the issues of trust and identity. In the future, how do we ensure that relevant identification is taken care of in a blockchain environment – including beyond finance? 

And third is trust in general. [The problem is] a lot of new players and actors in the Web 3.0 world are not reflected well in existing legislation. Take a DAO [decentralised autonomous organisation], for instance. Where does legislation stand on who is representing a blockchain or crypto exchange if it's a DAO, or Web 3.0 entity?”

My take

Excellent questions that get right to the heart of the matter. In a wholly decentralized, tokenized world, what organizations can still represent us, and why? And can you trust the innovators who say we no longer need such organizations?

After all, things didn’t work out in citizens’ favour in Web 2.0.