Tokenization: Creating a Blockchain utility token economy for your business
Caveat: If your intention of creating a blockchain token for your business is to do an ICO, this piece is not for you. Look for the next article.
I have had discussions with companies and entrepreneurs who wanted to adopt blockchain to their current business operations and how to tokenize it. I commend their boldness for trying to tokenize their business and thinking ahead but not the FOMO (Fear Of Missing Out) syndrome that has eclipse the blockchain ecosystem; which is still in it’s infancy. Currently, there is a craze to get a share of the unregulated form of venture funding from the public via ICO (Initial Coin Offering) despite ban being put in place by governments around the world trying to regulate the industry. Nigeria’s SEC stand on crowdfunding still places a dicey hammer on security/equity tokens.
Before tokenizing your business, you should understand what blockchain tokens are, the token economy and the market bearing on demand and supply. Also, you need to decide if you want to use a Federated/Permissioned Blockchain or Public/Permissionless Blockchain.
So what is a token?
Good question! A token is a digital asset. It is an object of value itself, or representation of any other asset on a digital ledger. A token can be native which serves as an incentive to help protect the network from attack and has governance rule-set, example is Bitcoin which is being paid to miners for block creation and validation. Ether; which is used for payment of transactions to the nodes carrying out block validation and confirmation. This is a perfect example of a token economy as it is reward based on the systematic reinforcement of target behavior.
With advent of Ethereum blockchain, startups can now be create tokens on the application layer stack of the blockchain and this has given rise to lots of decentralized Applications and Decentralized Autonomous Organization(DAO) using smart contracts. Some tokens are utility based while others are security.
A Deeper Dive Into Application Stack Tokens
Let’s take a closer look at tokens which has been a contentious issue between Government Regulators and blockchain Ventures trying to raise funds using the Initial Coin Offering(ICO)model.
Application Stack Tokens could be classified as work/utility, security or asset-backed token.
A work or utility token can be used as access right to contribute to a network like a DAO and receive reward for carrying out a particular task. This kind of token can also be exchanged for a service or product. A scarce utility token on a high-demand useful service/market can create massive value for holders of such token.
Security token gives holders right of equity in your venture. Holders can lay claim to revenue or profit of the venture. Issuers of such tokens promise returns to holders. Any token that passes the Howey Test is considered an investment contract or simply a Security token and this has been a long standing battle with Regulators still trying to find the right legislation for the industry.
Asset-backed tokens are backed with tangible assets like bonds, stocks, properties, gold, car, etc. The tokens represent the physical assets and transferring from one person to another confers the new holder as the owner of such asset.
Integrating Token into your business
Like I noted in the heading of my post, if your intention to tokenize your business on the blockchain is simply to do an ICO without having a well laid out plan, it is only a matter of time for your token to turn to just a speculative instrument without intrinsic value and gradually loose value with time on the exchange market.
Determine if you would be creating your own blockchain or simply use existing one that meets your need. If your business operation needs a smart contract on a public blockchain that provides privacy, then dero.io would be where to go though still in development. Hyperlegder Fabric is a federated/private blockchain you can also use to create a smart contract business application. Ethereum blockchain still remains the MVP of smart contracts on the blockchain even as more are joining the smart economy platform; EOS, NEO.
You need to bear in mind the cost of carrying out such token transaction on the blockchain as it relates with your business. E.g. Will the rising cost of paying for a service using the token affect usages of such token or the fiat-token conversion. Who bears the payment of transaction with the blockchain?
Important tokenization Steps to follow
Have a well crafted whitepaper explaining your venture in plain English that your 5 years old self will be able to understand. Assemble a development team to handle technicalities. Also bear in mind that a blockchain Security Analyst should be part of the development team. Create a quality website to carry much needed information about the project, team, road-map, whitepaper, FAQ, media handles, media coverage and publicity and any other relevant information. Build a community of users as this will have a big effect on the price of your token after ICO or Airdrop. You also need to determine which kind of investors you want to attract, because if you get more of speculators, token price can crash after ICO thereby affecting funds raised especially if they got it at a discount. Engage your community actively and run bounty programs that will give you lots of foot-soldiers to carry out tasks for token rewards.
Also, look at the size of the market you want to tokenize. What factors will affect the demand and supply. A token that is high in demand will surely be valuable to users scampering for the limited supply. Take for example a token being used as payment for a product or service. The more people demand for such token to make payment, the less the available limited supply. Another token example is SuperDAO SUP token which entitles holders right of vote in decision making, earning more SUP rewards for completing tasks, getting a share of the transaction fees of dApps being created, staking their already owned tokens for dispute settlement and getting rewarded and lots more. SureRemit is another wonderful example I like to cite. Their token is meant to help people in diaspora remit funds back home without going through money transfer agencies. Users buy their token to send to a receiver who uses such token in stores to make purchases. This creates a perfect demand and supply process for such token in the remittance global market.
There are many applicable use of tokens ranging from payments system to gaming, agriculture, transportation, data privacy, asset transfer, hospitality and lots more.
Where to start?
Ask yourself if truly, your venture needs a blockchain solution and why. Understand the blockchain ecosystem properly before venturing into creating a tokenize solution.
- What type of token will you be creating
- Do you need a public or private blockchain
- What happens if you fail to meet your funding goals/cap
In Summary
There is no recipe for success as even the most thought out plan fails. Some projects are bound to fail while some are doing well in market valuation with with whitepaper-base dApps or projects still in development. I find this medium posts resourceful which can help you understand more about token sales and ICOs especially successful projects that launched their.
Charles is a blockchain solution architect, web and mobile developer with a decade experience in the IT world creating applications and running several startups. Passionate about great ideas that have “Proof of concept” and scalablilty. #Fitfam gym dude and enjoys swimming when he is not in front of his laptop, bar, cooking, playing ping-pong or snooker. hey@cryptofefe.com
twitter: justcharz
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