Say what you will about Cryptokitties, but the app does something today that nearly all enterprise blockchains still cannot: exchange one item of value, a cryptokitty, for another item of value, ether.
That item of value may be silly (a digital kitten), but to those who care about them, it’s really enough.
More importantly, the entire contract and transaction, including the exchange of product, takes place on the ethereum blockchain. At EY, our hypothesis is that this kind of low-friction, closed-loop economic transaction is, in fact, the ultimate end game for most enterprise blockchain aspirations.
We’re still very far from that destination, however.
Right now, many enterprise blockchains are still operating like distributed databases and notary services, often with very specialized objectives, such as tracking product provenance. This is a useful start, but if we are not careful, it could be a dead end — a fancy, hacker-proof database, where the software company has replaced the central bank as the intermediary of choice.
To deliver on the full promise of blockchain technology, we believe that enterprises must embrace the full power of tokenization, and ultimately, the allure of the public network. And, 2018 is the year that this will come into view as the future of this technology.
Time for tokens
The foundation of this high-value future is the concept of tokenization: representing a company’s products and services as digital tokens on a blockchain, not merely as items of information, but as carriers of value.
Such digital tokens can stand for anything from pharmaceuticals to phones to music. Whatever they are, they should have assigned ownership and value. If you have a pallet of 1,000 mobile phones, each worth $1,000, that’s on a ship in transit, the blockchain should represent that with 1,000 small tokens with a collective value of $1 million.
When products are made, delivered or sold, value in the blockchain can change hands: 1,000 phone tokens for $1 million in U.S. dollar tokens. Not just bitcoin or ether, but U.S. dollar. Or euros or yen for that matter.
Set aside the debate about the value of traditional fiat vs. cryptocurrencies for the long run. The simple fact is that enterprise CFOs want to be paid the same currencies in which they have expenses and long-term liabilities.
That means tokenizing traditional fiat currency and doing so in the same blockchain as the products and services are tokenized.
Having both types of tokens in the same blockchain is critical — it is what enables the seamless, low-friction and low-risk exchange of items of value. Cross-chain connections are a nice idea, but they can’t beat the power and simplicity of direct exchange.
Central banks are already experimenting with the tokenization of their own currencies, but doing so in private, permissioned or proprietary blockchains that are managed by the central banks. It is a good start, but the next logical step is to create the legal and regulatory framework that enables the tokenization of fiat currency on any industrial or public blockchain.
Once a closed-loop tokenized industrial blockchain exists, many of the key foundations of specialized blockchains would become add-on features in the true economic blockchain. Trade finance is easy if you trust that the representation of 1,000 phones, each worth $1,000 is accurate — you can loan money against those tokens in the blockchain.
Similarly, customs declarations, tax calculations, and product history and provenance are all easily derived from looking at the history of the tokens in that blockchain. No separate blockchain is required for trade finance, payments or product traceability.