Introducing the age of the tokenized business

What does tokenization really means for industries and businesses in the long-term, beyond issuance, speculation and hype.

 

While the current cryptocurrency bear market has been a struggle for many ecosystem participants, it has been great for the health of the ecosystem as a whole. The downward trend allows market observers to step back and analyze the various participants; separating hype from real value. Prices may have been steadily shifting downwards of late, but for many, project development has only been picking up steam.

The current market climate helps separate businesses and thought leaders that are truly contributing towards the future of blockchain from those who are only in it for the ride. This period also helps everyone take stock and understand what tokenization really means for industries and businesses in the long-term, beyond issuance, speculation and hype.

In this article, the Element Group team attempt to paint a picture of the tokenized landscape, from its glory days of 2017, to its current setting as a maturing commercial format in a tough industry, to the future outlook for tokenized businesses in general as they validate themselves and their alternative enterprise as a long-term fixture in the market.


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The meaning of tokenization

Retrospectively, it’s clear that the 2017 token sale boom was only partially driven by technology enthusiasts and the projects which organically required a token for their success. Growth within the space primarily relied upon a variety of people and organizations from different backgrounds seeking to raise funds in a non-traditional, open market way. And for many projects, the existence of a token was coincidental rather than necessary.

That being said, many blockchain-based projects showed themselves to rely heavily on an effective tokenization model. Within functioning blockchain projects, a token can serve a variety of necessary purposes, depending on the project itself: it can be a vehicle of access for goods or services; it can be a way to organize governance within a decentralized organization; and it can be a way to incentivize essential ecosystem participants.

With such a variety of uses having developed, there is now also a wider variety of token economics models, each tailored to a specific project. Token supply can be fixed, or tied to an inflation rate, or even a complex monetary system. The token price can be pegged to the US dollar, or bitcoin, or even the price of gold. In a fully decentralized business model, it makes sense to issue as many tokens to as many people, while mixed models may want to limit token supply or have a specific organization hold on to a large chunk of the supply.

Ultimately, there is no off-the-rack model for true tokenization. While raising capital through an ICO may have seemed somewhat algorithmic at its peak in 2017, tokenization itself is proving itself to be as different as the businesses that pursue it. Once a business has issued its own token and has gone through the arduous fundraising process, what remains is a novel organization in uncharted territory. Launching a tokenized business is one thing — running it is a completely different breed. It requires answers to a multitude of questions which didn’t even exist a mere five years ago.

Beyond the ICO phase

Issuing a token and successfully distributing it within the community requires a wide range of tools and resources. Building a sturdy business structure that has tokenization at its core requires a team that can address complex marketing, technical and legal considerations. Even at the height of the ICO rage, when it came to such matters, many projects failed before they had even had the opportunity to get off the ground.

The culprits for this were numerous, but we can identify three categorical issues: security, technology, and community management. Notably, teams found it difficult to organize the KYC/AML process of their token sale in a way that was compliant while maximizing participation. Security of the company’s and the participants’ funds was a recurring hurdle for token issuers to overcome. After the funds were collected, many teams ran into difficulties when it came to communicating with their communities and issuance of tokens.

With the rise of tokenized equity, the considerations involved in tokenizing a new or existing business are even broader. A project that chooses to pursue the STO (Security Token Offering) route would need to combine the legal and technical considerations of token issuance with best practices involved in traditional fundraising, for example.

But even after the issuance process is complete, the challenges are far from over. As the project moves from fundraising and outreach into development, community management, and governance, the intricacies involved in this next phase may seem new and unexpected to even the most seasoned entrepreneur.

For example, if you run a tokenized startup, would your employees receive tokens instead of the more traditional equity packages? If so, how would you manage this? And if your project’s primary holdings are digital assets, how will you assure your business survives volatility while you are navigating accounting and taxation? The best tokenized projects begin by considering these issues even before they issue their assets to the public — integrating them into their project’s DNA.

A new infrastructure

At the same time that the ICO fundraising mechanism gained popularity in 2017, the array of service providers catering to the ecosystem increased as well. Now that fundraising for a tokenized business is no longer a one-size-fits-all algorithm, only the service providers that are insightful and flexible in their approach to the intricacies of tokenization remain.

Most companies which successfully raised funds through token offerings in 2017 are now entering a new phase: actively developing their products and engaging with their communities to strengthen their technology. This phase requires a completely new set of tools and service providers to emerge: those who do not consider issuance are in a silo that does not allow for the wider life-cycle of the tokenized business.

We predict that the difficulties of the current bear market will provide an incentive for the industry to refocus its efforts. Simply raising capital is no longer feasible in the current climate, so a more long-term approach will now need to be fostered by both issuers and service providers. As the market matures, so will the underlying infrastructure: the focus will shift from a momentary approach to a more holistic and long-term view. Our belief is that this phase is inevitable, but ultimately beneficial for the development of the industry as a whole.


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