Over the past few years, blockchain technology has piqued the interest of a whole host of businesses, from a rich variety of sectors. According to a recent survey from Deloitte, 98 per cent of UK businesses have either already deployed a blockchain solution or intend to do so at some point in the future.
However, enterprises exploring the technology are primarily using private, permissioned blockchain to increase the efficiency of record keeping and data processes. Tokenisation is one of a number of functionalities going underutilised as a result of this limited scope.
So, how can businesses harness tokenisation using public blockchain to access untapped value?
Public vs. private blockchain: What’s the difference?
Many are unsure about the difference between a public blockchain like Ethereum and private blockchain such as Hyperledger. It all comes down to the scale of the network and who is allowed to participate.
Public blockchains are hosted on public servers, and anyone can join, read and write data to the chain. These systems are highly resilient and boast high levels of privacy due to the anonymity of each participant.
Private blockchains are much smaller in scale, and hosted on private servers. Only authorised participants can join, read and write.
Both public and private blockchains can also be permissioned. In the case of public blockchains, this means anyone can join and read, but only authorised and known participants can write. On private, permissioned chains, only the network operator can write data to the chain.
By deploying a private or permissioned network, enterprises can harness the power of distributed databases, but miss out on the true potential of public blockchain—its shared state and trustless design. Both types of blockchains have their uses, but many underestimate the value of public blockchain in enterprise.
What is a token?
In simple terms, a token is a digital representation of a unit of value. This unit of value can be assigned to an intangible asset such as a cryptocurrency, or a physical asset such as property or a piece of art.
Software code in the form of “smart contracts” can represent agreements between individuals, enterprises, and governments, and utilise tokens to facilitate these transactions.
Using public blockchain, the combination of these technologies unlocks a wealth of opportunities in enterprise.
How can organisations employ tokenisation?
Streamlining value transfer
At a technological level, tokens can be utilised as a common protocol for data and value transfer, which can lower transaction costs and increase speed.
In any supply chain, a set of complex contracts define agreements between supplier, manufacturers, and retailers. However, on occasions when these terms are not met, a lengthy bureaucratic process is required to determine culpability and financial penalties.
By connecting automatic value transfer with contract terms using tokens and smart contracts, overall transaction speeds and costs can be reduced.
Democratising the financial ecosystem
In the Philippines, 56 per cent live with limited access to the financial ecosystem. Rural banks are neither connected to any electronic banking service, nor to domestic and international money transfer networks.
This challenge can be surmounted using a combination of tokenised assets and a fluid, cross-border platform to create the building blocks for an open marketplace.
A cash-backed token, or “stablecoin”, that can be openly traded in a national system can be used to create an open payment network. These digital tokens can be used to instruct and settle remittances between participating rural banks by consolidating messaging, execution, settlement, and accounting of the transaction through one platform.
Asset tokenisation
Tokens can be used to represent the whole or a fraction of a real-world entity. These entities include natural goods like gold or oil, real estate, financial instruments, and more.
Tokenisation allows traditionally illiquid assets to be split into smaller, more liquid components. Liquidity is all about easily getting in and out of assets, and the all-or-nothing ownership principles of our current markets make exchanging assets for value inefficient and sometimes impossible.
By allowing for the fractional division of assets, tokenisation addresses this issue, creating greater freedom in the trading assets and decreasing illiquidity premiums.
New crowd-funding models
Tokens can also be used to represent rights to a future good or service. This allows projects to raise funds in a new way and create buy-in from a potential userbase, even before a product or service has been launched.
Whereas investment into early-stage ventures has traditionally been restricted to venture capitalists, tokenisation creates additional investment models based on the principal of crowd-funding.
Whilst the uptake of private, permissioned blockchain in enterprise is a positive sign of the value and longevity of the underlying technology, businesses are missing out on the value tokenisation can provide.
Certainly, private blockchain has the potential to improve the efficiency and transparency of business processes, but its benefits are limited in scope. Public blockchain has the potential to be far more transformative, because its core characteristics allow for the creation of entirely new business models, unlocking previously untapped stores of value for businesses.