Digital assets made possible by Ethereum will unlock the largest liquidity event of our lifetime.
Many of the world’s assets are illiquid and therefore inherently difficult to transfer between owners. Lengthy paper processes, complex fee structures, and the all-or-nothing ownership principles of our current markets make exchanging assets for value inefficient, intimidating, and sometimes impossible. However, as more people come to realise the gravity of this issue, more thought is going towards how to address it and how to unlock previously inaccessible stores of value.
Distinguished economist, Milton Friedman, once wrote about a tiny island in the middle of the Pacific Ocean called Yap. Though only a minuscule piece of land smaller than Liverpool or Manchester, Yap has preoccupied many economists and monetary theorists, shedding new light on the age-old question: What is money?
Ever since organised societies came into existence, their members have used commodities such as salt, cows, tea, and cocoa as currency. The natives on the tiny Pacific island of Yap created a system of trading wealth that didn’t rely on bills or banks, or even a single trusted leader. The scarcity of stones on Yap led voyagers to travel to other islands in search of limestone, which they then carved into large, circular disks called rai. The value of rai lay in the stones’ scarcity and the challenge of transporting their immense weight over long distances.
Having such unwieldy money meant that when stones changed ownership as part of a transaction or gift-giving, it became a logistical impossibility to relocate them. Some stones were even left several feet underwater. Instead, the community collectively kept track of who owned which stone and how many times it changed ownership. The more people that remembered to whom the rai belonged, the more secure the ownership and the more effective the currency. In many ways, money has always been a collective story about who owns what.
Fast forward circa 800 years to present day, and computers are harnessing Ethereum blockchain technology to tell the story of asset ownership. The Ethereum blockchain creates and cross-checks a digital record of every transaction that has ever occurred and duplicates this record across thousands of computers. Similar to the way natives of Yap used a collective basis of trust to account for and authenticate their stone assets, blockchain technology is enabling trust in the ways value is transferred and stored today.
Most importantly, blockchain is unlocking hidden stores of value. The ability to tokenise assets on the Ethereum blockchain means that ownership can be fractionally divided and that assets can move seamlessly between owners––without actually having to move.
Real estate, for example, represents a clear use case for the tokenisation of traditionally illiquid assets. Ownership and investment have historically been reserved for a wealthy minority. Creditors are increasingly stringent with prospective home buyers hoping to take out mortgages. Sellers are put-off by large cuts throughout the transaction cycle. And renters, lacking the liquidity to make a down payment on an entire property, are stuck burning rent instead of building equity.
This long-standing issue can be addressed through the implementation of a blockchain platform for shared property ownership. Whether it’s property managers diligently maintaining a property in which they hold shares or music fans patronising a venue they partially own, a shared ownership model empowers users across the board and aligns stakeholders’ incentives to drive overall asset value. In a model such as this, prospective investors have access to a variety of real estate with far greater liquidity and far lower capital requirements. This is particularly important in the context of global cities such as London in which property prices have spiralled, thus denying access to a generation of first-time buyers.
The revolutionary concept of tokenisation can also be applied to energy markets. Blockchain technology can be used to provide access to wholesale energy markets and facilitate energy trading between users. In this system, Internet-of-Things (IoT) devices not only balance the load on the grid, but also identify arbitrage opportunities. Tokenisation can be used in this context to bring next generation efficiencies to energy markets and savings to consumers.
With the power of blockchain technology, we can unlock an unprecedented explosion of liquidity in our lifetime. As the world continues to realise the advantages of natively digital assets for everything (natural resources, fiat, gold, music, Madonna concert tickets, software, stocks, etc.), transactions will become frictionless, and getting in and out of assets will be seamless. In the same way that the internet commoditised communications, blockchains can commoditise the cost of how society trusts, whilst also opening up previously inaccessible stores of value.
Contributed article by Andrew Keys, Co-founder of ConsenSys Capital