Cryptoasset is a rather abstract term. For many, it primarily means an opportunity to make quick money (or lose money) in the cryptocurrency market. Of course, the price development of crypto assets (aka tokens) is largely speculative. However, tokens do more than that. They represent a milestone in economic and social development. So it’s worth looking at tokens and the emergence of these (tokenization) in addition to transactions.
Actually, what is tokenization?
Tokenization is the ability to digitally represent any aspect of a product, person, company or process and make it part of a broader digital ecosystem. In other words, tokens can be used to digitally represent and “price” any value.
Of course, the principle itself is not new. For example, a stock is a representation of a company to which its value is attached. Traditional currencies follow this principle, as do trading cards, and more. In all of these examples, a value is represented (stock, money, trading card) and assigned a price. Price is determined by an objective and a more subjective value.
No real value!
It is precisely this kind of value consideration that seems to be out of shape on encrypted tokens. Why is the price of a crypto asset like Ethereum soaring? Why are people paying millions of dollars for a photo of an ape? Why is virtual land being bought for what appears to be a dire price?
Let’s take a closer look at where the price of a value comes from. Objectively determining the utility of classical values, such as a company’s sales or profits, is relatively straightforward. However, as already mentioned, this is only one aspect of the story. Because even in the physical world, most price developments follow subjective evaluations, which are much more complicated.
This post is not intended to be a treatise on pricing, but I want to highlight two basic elements that are critical to any valuation.
- belief in a certain future performance
- Express belonging and status within normative peer groups
A few examples will show that these factors have a much greater effect on prices than purely objective considerations.
- The value of a stock is largely determined by the belief in the company’s future performance, and it is also an expression of belonging to a shareholder group (technical shareholders, value investors…).
- The value of FIAT currency, as the name suggests, is determined by the belief in safeguarding the power of the government and an expression of belonging to the political system behind it.
- The value of Panini trading cards comes from the belief in the development of value on the one hand, and on the other hand, it expresses a sense of belonging to a certain collecting group (fans of the club and collectors of cards).
So, as we’ve seen, price decisions are driven by beliefs and a desire for belonging and status within the peer group.
Internet makes belonging without borders
In the physical world, peer groups always operate within certain boundaries. This could be a country, a political system or a market. People outside these boundaries are excluded. What is special about the digital world is that it dissolves these boundaries. Due to the open and global nature of the Internet, digital services are in principle available without borders.
The possibility of expressing belonging and status within a global peer group is articulated by social networks. With them, it becomes easy to build a global community beyond physical boundaries. But these systems are also boundary-based. In this case, they are determined not by political institutions, but by companies like Facebook (or now Meta). These companies set boundaries by managing user affiliation and status.
Therefore, in order to achieve true borderlessness, a key problem must be solved. How can status and belonging be linked to value, rather than being done by corporations or the political system?
This ultimately brings us to blockchains and tokens, because that’s what the technology and associated tokenization enable. With blockchain technology, it is possible to lock the provenance and attribution of records to the value itself, rather than a central registry (such as a central bank, political system, or private company). With tokenization, anything that can be expressed digitally can be tied to attribution and status. Sounds abstract, so let’s look at some examples.
First, the protocol, the underlying infrastructure itself, is tokenized. Through an ICO (Initial Coin Offering) on the Ethereum network, (expected) benefits are mirrored in the form of protocol tokens (ETH) and made available to the general public. In this form, the development of open protocols is funded. ETH tokens represent affiliation and status within the reference group of supporters of this decentralized technology. In this way, a basic decentralized infrastructure is created, which provides the basis for further development.
Since then, many applications have been created based on the Ethereum protocol, each of which has a value proposition represented by tokens (utility tokens).
If we look at utility tokens, community structure is crucial to the definition of token price. Valuations are primarily based on expressions of belonging and belief in the respective projects. Objective utility is subordinate to these.
Besides utility and utility tokens, non-fungible tokens ( NFTs ) are also a hot topic right now. This involves the tokenization of unique assets. Basically, this is similar to trading cards in the physical world. With NFT, a unique object (unforgeable) can be given a unique digital representation. Even more than utility tokens, the pricing of subjective value is decisive here. How much objective value is a jpeg of an ape? Not much! How much is the expression of belonging to the “Bored Ape Yacht Club” worth? Obviously a lot, after all, people are willing to pay the equivalent of $3.4 million in ETH tokens for a rare ape. Owning a Bored Ape also provides the utility of access to exclusive services, but most importantly, it is an expression of belonging to a community, of standing in that community, and of the belief that those values will continue to grow.
If belonging and status are important drivers of asset development, they largely function as social networks. By fixing economic concepts in the utility form of tokens (token economy), a digital society can emerge on the basis of tokens, which can transcend the boundaries of the physical world. The resulting momentum can now also be controlled on a token basis, or in other words, groups of peers represented by tokens. DAOs (Decentralized Autonomous Organizations) took on this task. In a DAO, the development and control (governance) of the organization will be carried out by token holders.
Therefore, how to measure the value of an asset mainly depends on subjective rather than objective observation. This applies not only to crypto assets, but to them in particular. The possibility of a truly infinite community, for the first time, is driving development. The mapping of more and more applications and the emergence of more and more NFT projects have led to the fact that the expectations originally placed in protocols such as Ethereum are increasingly being met, and new, larger The expectations are also based on this. Higher attention and awareness leads to increased community, which leads to more and more social capital. This is an important driver of the development of crypto assets.
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