Dr Edward George – disruptive technology consultant in emerging markets and former head of group research at pan-African bank Ecobank – offers a guide for the uninitiated on the benefits of blockchain and the tool that releases its potential – the e-token
Over the past two years, blockchain has grown from a fringe innovation into the latest tech buzzword, beloved, misunderstood and overhyped in the media and on the conference circuit. But like all buzzwords there is huge confusion over what exactly ‘the blockchain’ is. How is blockchain different from distributed ledger technology (DLT), something most professionals are familiar with, and how can blockchain solutions be applied to the real world?
Let’s start by calling a spade a spade. Put simply, the blockchain is a database. That, most people can grasp, but blockchain is unlike any database you have previously experienced. It is designed with controls that ensure all data stored on it are accurate, unfalsifiable and accessible to authorized parties, while removing trust barriers for the transfer of sensitive data.
How does the blockchain do this? First, every blockchain is a complete chronological record of transactions, all of which are accessible and traceable back to the root. In the blockchain there is nowhere to hide, which delivers trust in the data.
“In the blockchain there is nowhere to hide, which delivers trust in the data”
Second, the rules for participating in a blockchain, whether open or private, enforce good behaviour – you have to obey to play – and any violators can be quickly identified and ejected. This builds integrity in the system and delivers digital trust.
Third, blockchain enables the frictionless transfer of sensitive data between authorized parties, seamlessly removing many of the trust barriers that exist in a transaction, whether B2B or P2P.
Taken together, these factors make blockchain a ‘truth engine’, the power of which can be leveraged for all interactions that require high levels of security and trust. However, like all new technologies, blockchain is no panacea. Rather, it is an enabler, and the tool for enabling its power is the e-token.
E-tokens are created whenever a new block is added to the blockchain. The first e-tokens created on the Bitcoin blockchain were cryptocurrency tokens, which could be exchanged seamlessly between anonymous parties. Since then, multiple user casers for e-tokens have been developed, many of which go beyond settling digital transactions.
Put broadly, there are three types of e-token:
- Payment token, a cryptocurrency that is used, like a fiat currency, to settle transactions
- Utility token, which gives users access to participate in a blockchain network
- Security or Asset token, a disintermediated asset, eg a share in a company or a trade asset
However, these definitions are fluid and many tokens combine hybrid functions, depending on how they are used to build the blockchain network. For example, Ethereum is both a utility and a currency token, depending on how it is used. Therefore e-tokens are best thought of as user cases, rather than as having a fixed and limited purpose.
Payment tokens – cryptos – have predominated since the launch of Bitcoin in 2009, with more than 1,500 cryptocurrencies in existence. Despite the explosion in ICOs (many of them dubious), cryptos have yet to deliver on their promise of replacing the global payments network with anonymous crypto-payments.
Part of the problem lies in the tech itself. The original Bitcoin blockchain is, by comparison with other digital payment networks, slow and energy-intensive – the result of a technological weapons race between Bitcoin miners. At current rates it takes 538KwH of energy to mine one Bitcoin; that is the same energy required to make 300,000 Visa transactions, or to power a UK home for two months.
The carbon footprint of each Bitcoin is also substantial – about the same as the average US car owner produces in one month. Various companies are looking at building a more efficient blockchain, such as Hedera Hashgraph, but for now most cryptocurrency transactions remain relatively slow.
Then there is the speculative bubble that has grown around cryptocurrencies, much of it driven by fraud and hot money. This drove up the price of Bitcoin and Ethereum to record highs in December 2017, before they collapsed in early 2018, wiping out most of their previous gains. Coupled with numerous scam ICOs, the reputation of cryptocurrencies has been severely shaken.
But the key criticism of cryptocurrencies is that they are not fulfilling their primary user case: namely, to settle transactions. Probably less than 2% of all Bitcoin transactions are used for payment. The vast majority of flows into and out of cryptocurrencies are made by investors, speculators and a fair number of con artists.
Bitcoin was initially dismissed as a solution looking for a problem, and to date cryptocurrencies have failed to deliver a convincing user case. But disappointment over cryptocurrencies should not overshadow the other user cases for e-tokens.
The most popular is the utility token. This is a broad category of e-token that includes app coins, user coins, network access coins and subscription tokens. Utility tokens give users access to use a protocol or DAPP on the blockchain, enabling them to do things on it, such as buying or selling goods and services, or receiving discounts or premiums in return for growing the network. Utility tokens are commonly issued in ICOs to raise working capital and to cover the costs of building and maintaining the network.
There are numerous examples of utility tokens. Atlas Money uses utility tokens to digitalize informal lending structures in West Africa (eg the ‘susu’ in Ghana), enabling the unbanked to bank themselves. Binkabi uses its utility token (BKB) to reward users who build the platform, while dis-incentivizing those trying to speculate on its value. And some companies are using utility tokens to share digital storage space, led by the ‘Airbnb of hard drives’, Siacoin.
Then there are asset tokens, which are used to disintermediate assets, enabling users to own part of an asset through a crypto token. One of the most popular assets for disintermediation is gold, a traditional store of value in most cultures. For example, Goldmint is using asset tokens to digitalize the pawnshop business, issuing GOLD e-tokens that are stable coins pegged 100% to physical gold holdings.
“One of the most popular assets for disintermediation is gold, a traditional store of value in most cultures”
Other innovators are experimenting with tokens to disintermediate assets like cars, buildings and companies, enabling all consumers to become micro investors. In the trade finance space there are numerous asset tokens for distributing trade finance assets, syndicated loans and invoice discounting, as well as for use on commodities exchanges.
The final key category is security tokens. These are digital stock certificates for equities, bonds or derivatives, which go up and down in value like shares, and can pay dividends. However, there is much uncertainty over the definition and legal status of security tokens, especially concerning the rights they give the owner over the underlying asset. As a result, several innovators are working with regulators to develop compliant platforms for the trading of crypto securities.
Aside from these core user cases, there are many other kinds of e-tokens under development. There are verification tokens which trace commodities (especially conflict minerals like diamonds and coltan) through the value chain, led by companies like Everledger, DORÆ and Seal. Some tokens enter into the field of behavioural economics and are the hardest to define in terms of their true value.
Reaping the rewards
One such token is the reward token (aka the reputation token). This is given to users of a particular blockchain or cryptocurrency, rewarding positive behaviour (eg completing an online course, or helping build the platform) and enhancing their reputation through a decentralized reputation ecosystem (DREP).
The idea is that the award and exchange of these tokens can incentivize good behaviour, whilst dis-incentivizing those who don’t want to play by the rules from joining the network. Ultimately, e-tokens could become the basis of every individual’s digital identity, being exchanged with authorized parties when applying for a passport, opening a bank account, booking a healthcare appointment or setting up a business.
When taken together, the multiple user cases for e-tokens demonstrate the potential for blockchain technology to remove frictions and deliver digital trust. Coupled with the power of the cloud (notably machine-learning), e-tokens are ideal for removing bottlenecks in commodity finance, agribusiness and logistics, which require numerous documentation and authorization checks.
The growing use of e-tokens over the next decade will drive the emerging field of tokenomics, the mechanisms and market functions of which we are only starting to understand, but which has the potential to disrupt how we transact all of our business.