The Blockchain Killer App: Ethereum Tokens
This week, Gnosis launched a token and sold 4% of them for 250,000 ether… in less than 15 minutes. This comes to around $12.5M USD and implies a total token valuation of $312.5M. If killer apps prove the core value of larger technologies, Ethereum tokens surely prove the core value of blockchain, made evident by the runaway success that tokens have brought to these new business models.
Blockchains are secure, decentralized ledgers of transactions that are safe from tampering. Bitcoin was the first digital currency to store transactions on a blockchain. Its designers introduced a revolutionary method to transfer value without having to trust a counterparty and without requiring a third. For the first time in history, transactions and balances could be trusted in a decentralized manner.
Decoupled from Bitcoin, blockchain technology can be used to create even more kinds of digital assets.
Ethereum is a blockchain that runs programs called smart contracts. A smart contract can define a digital asset that includes functions to trade and check the balances of its holders. Because the code is public and its state is stored on the blockchain, holders of a digital asset can trust that their ownership is verifiable and under their control. As a result, a burgeoning token market, built on smart contracts, has emerged.
This token market may be used as a mechanism for fundraising to support development, or as in the case with Gnosis, a mechanism for selling access to your product once a large portion of your development is complete.
When a new technology is introduced we should ask: What does this new technology allow that was not possible before? What barriers did it remove? I’ll attempt to illustrate the token phenomenon by reviewing the current state of the asset market and listing the frictions that Ethereum smart contracts have removed.
As a disclaimer, most tokens do not represent equity ownership in a company but rather utility on a blockchain platform. Even if the assets are fundamentally different, though, the establishment of trust is analogous.
Friction Gone: Issuing Assets
When an asset is created, it must be underwritten and issued, usually a lengthy process that ultimately ensures that the asset created has many properties including uniqueness, fungibility, and that it actually is a real asset.
On Ethereum, with the use of a public smart contract, all parties can know the number of tokens outstanding, fungibility, and existence on the Ethereum network without the need of a lengthy underwriting process. You deploy your contract, and that’s it.
Friction Gone: Transferring Ownership
In the old paradigm, when you want to transfer an asset, you must do so through a brokerage account. The brokerage has a level of trust established with all other parties, which helps ensure that transactions never fail, and if they do, the broker will step in and take the position on behalf of their client.
On Ethereum, there is no need for a trusted brokerage account to transfer ownership. Transfers are conducted on the contract itself, and the transaction runs exactly as programmed, every time, with no chance of failure.
Friction Gone: Clearing Trades
The clearinghouse serves as the ultimate source of truth. Clearinghouses function to verify the “state” of the world, that is, who owns which asset. If there is a dispute, the clearinghouse records can be used to resolve that dispute.
On Ethereum, you guessed it, we always know the state of the world.
A Frictionless Future
The amount of trust previously required to transfer value was burdensome and is almost completely relieved by what we can now do with Ethereum. The barriers for large, trustworthy capital raises have been removed. We are now seeing a wave of launches that break tokens through as the first killer app of of blockchain technology. Bitcoin, in many ways, is a “proof of concept” for a blockchain-based asset. The Ethereum platform is proving that concept at scale.
This is a massive paradigm shift. More and more individuals and companies of all sizes will be looking at Ethereum tokens. VCs are involved.
Would you consider launching a token for your project or business?
Michael Oved is passionate about a future where people fearlessly trade digital value without third-party intervention. Ethereum could make that a reality.
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Disclaimer: The views expressed by the author above do not necessarily represent the views of Consensys AB. ConsenSys is a decentralized community with ConsenSys Media being a platform for members to freely express their diverse ideas and perspectives. To learn more about ConsenSys and Ethereum, please visit our website.