EdenBase Insights: Is Cryptocurrency Holding Back Digital Assets?
Historical Context and Definition
Tokens have been integral to computer networks and applications since the advent of computerisation. Essentially, tokens were a method of storing, managing, and transmitting data such as serving as a means of user identification and typically comprise information that identified an object and determined its privileges.
The Role of Tokens in Public Blockchains
Public blockchains significantly advanced the concept of tokens, resulting in the creation of various types of token that enable and support blockchain operations. These tokens provide essential utility functions that ensure the secure operation of public blockchains. In the Bitcoin network, tokens were designed to function as a currency; however, it may have become more akin to an asset. Most importantly, it is crucial to note that these tokens were not originally intended as speculative instruments.
The Misalignment of Speculation and Utility
Tokenisation of assets holds considerable potential in the financial investment and future of computer gaming industries. However, the combination of tokens designed for public blockchain operations with speculative purposes has proven problematic. Assets designed for speculation and value growth can undermine the fundamental operation of these tokens and contradict their utility.
Despite the value of speculation and asset growth for emerging companies and the profitability for marketplaces, holders, and traders, the focus on the asset aspect has overshadowed their utility. Initial Coin Offerings (ICOs), such as Ethereum's, were initially intended to distribute tokens to potential users of the platforms. Yet, the Brave ICO on 31 May 2017 marked a significant shift, raising $35 million in less than 30 seconds. This event transformed ICOs into a primary fundraising tool, shifting the focus of utility tokens towards fundraising. As most ICOs were transacted in ETH this had a huge impact on its price, making ICOs seem even more attractive for fundraising.
Ethereum Price Before and After the ICO Boom
The Shift Towards Speculative Tokens
Subsequently, tokens began to be designed and marketed primarily for their potential appreciation, often ineffectively. This shift led to their makeover as cryptocurrencies, where their utility became secondary. Speculation in tokens generated substantial wealth for early adopters and the agencies involved. Listing and trading on exchanges became highly profitable, resulting in a centralised industry dedicated to ICOs, token marketing, and trading. Ironically, this centralisation contradicted the decentralised ethos of blockchain operations.
The Impact on Blockchain Innovation
The emergence of cryptocurrencies from these tokens has stifled innovation from within the blockchain sector. The initial design of tokens as financial and speculative instruments, starting with ICOs and evolving into decentralised finance (DeFi), further diverted focus from utility. Centralised exchanges have demonstrated that financial incentives drive centralisation and unethical practices, as evidenced by the collapse of FTX and other exchanges and protocols, further undermining the decentralised principles of blockchain technology.
The Future of Token Design and Regulation
To advance the public blockchain industry, it is imperative to design tokens that prioritise their utility and operate in a decentralised manner. Regulatory measures will either suppress the token market—a utility token cannot operate as a regulated instrument—or necessitate the design and distribution of tokens solely for their utility, which would allow them to remain unregulated. While tokenising financial instruments has its place, and is inevitable for the entire financial industry, and tokens like Bitcoin, which serve specific functions, remain relevant, there must be a clear distinction between utility tokens and cryptocurrencies. Maintaining this distinction is essential for the healthy development of the blockchain industry.
Benefits of Accelerating Digital Assets
This is important because tokenising digital assets offers a simpler alternative to traditional asset management by wrapping assets into smart instruments, increasing efficiency, reducing costs, enhancing liquidity, and minimising fraud by automating processes prone to human error. It also enhances transparency, facilitates fractional ownership, and improves liquidity for traditionally illiquid assets. Regulatory compliance can be integrated into these instruments, potentially making them suitable for a broader audience. And unlocking them to be traded globally, allowing wider access to capital markets while adhering to global and local regulations.