This week some of the blockchain industry’s leading companies, minds, and investors met in Toronto for the Futurist Conference, hosted by Untraceable. Hosted at Rebel/Cabana in Toronto’s east port lands, it makes for a great summer event with great learning and networking right on Lake Ontario.
MRS has been active at blockchain industry events for years to stay on the current technology trends. These events are much different than they used to be: Futurist 2019 was sponsored by companies like BDO and George Brown College, and EY even put on a session around “smart contracts”. The growth is fascinating to see and should lead to technological adoption over the next few years.
One of the leading minds in the space, Vitalik Buterin, kicked off the event with a keynote Tuesday morning. Vitalik is the creator and lead developer for Ethereum, a blockchain network intended to run decentralized applications overtop of it. Sometimes these decentralized applications are called “dapps” and contain software programs known as “smart contracts”, which EY sponsored a session for. Ethereum is the second largest cryptocurrency by market cap behind Bitcoin and is the number one blockchain platform in terms of developer share. While it is still early days, there are already a few working examples of decentralized applications (or “dapps” as they are often called). Examples of these are Gitcoin, which incentivizes open-source development contributions, and CryptoKitties, which are unique digital collectibles (cats) like digital Tomagachi toys. MRS has built some simple smart contracts as tests for clients with some degree of success. Certainly, the eco-system will need to continue to grow for businesses to realize ROI and even entirely new forms of customer relationships through smart contract applications.
One underlying theme throughout the 2-day event was this concept of “tokenization”. The concept that all assets can be more liquid and tradeable from real estate to stocks to vehicles.
What is Tokenization
Tokenization refers to the idea that all assets, physical or otherwise, could be represented by a “digital token” on a blockchain such as bitcoin. The easiest way to understand this is by using securities as an example. Right now, in order to own a share of a public company one must go through a brokerage account. The process is long and convoluted however there are many intermediaries that must be passed through in order to make a trade. With blockchain technology, there would be no intermediaries which would allow securities to be much more liquid as they could be traded peer-to-peer.
Now of course, regulations do exist in our world for good reason. Blockchains are great systems for finality and ownership determination, but they are virtually impossible to reverse and cancel transactions once they are made. The Futurist conference heard from companies who are providing digital KYC/AML services that work hand-in-hand with tokenization platforms. One of the world’s leading tokenization companies is Polymath, located here in Toronto. They had a large presence at Futurist including their CEO, Chief Growth Officer, and Head of Tokenization. Turning securities into tokens will improve life for investors and traders but not be a drastic change to most people’s everyday lives beyond the efficiency savings. Interestingly, in hearing their panel discussions, their Chief Growth Officer suggests that almost all jurisdictions and stock exchanges understand that this shift is inevitable, but “no one wants to be first, second, or last to do it”. According to Polymath and others at the event, it is really just a matter of time before one of the more innovative stock exchanges tokenizes the securities on their platforms.
Another company was pitching their new system which would allow investors to purchase a token representing a share in a plot of real estate or home. This is interesting as real estate is a very illiquid asset class. Tokenizing real estate could enhance liquidity, lower the barrier of entry to investing in real estate and also allow people to invest in other jurisdictions than their own. Similarly to securities, this will require ongoing improvements in the KYC/AML technology landscape. However, it is easy to see how this new technology can change existing paradigms. It will be interesting to see how this product and similar networks grow in the coming years. Particularly, it will be interesting to see whether they can fit into existing regulatory frameworks or if we will require entirely new laws and/or classes of laws to regulate it. Certainly, there is a risk in owning a share of a physical asset, like a house, in which you do not know the other investors. These other investors may be money launderers or have acquired money through other fraudulent means.
The great thing about existing permissionless blockchains is that anyone can use the network for a small fee. The tough part about permisionless blockchains is that anyone can use the network for a small fee. There is no blacklist capability at the protocol level (though currency exchanges can and do blacklist bitcoins they believe were used or acquired illicitly). It will be interesting to see how these systems manage to implement a degree of control to what is, by design, a decentralized, permissionless architecture. “Permissioned” blockchains do exist, in which only pre-identified entities may interact with the network. This is handy in cases where some control is needed but the network participants still do not trust one another. For example, legal jurisdictions may want to have control over who can buy and sell property in their jurisdiction, but they do not trust other legal jurisdictions. A permissioned blockchain could ensure that only proper legal jurisdictions can confirm real estate transactions on the network while still allowing global interoperability between these jurisdictions. As you can see, there is a trade-off between the decentralized nature of a “permisionless” blockchain like Bitcoin, and a permissioned blockchain. Ultimately, a blockchain is a poor data structure for any system other than one in which the participants do not trust one another. Currently, the most widely used blockchains are public, such as Bitcoin and Ethereum. Outside of a few test cases, such as Wal-Mart’s food tracking and IBM’s many pet projects, permissioned blockchains are rarer.
Despite the hype surrounding the technology, the insane money raised in ICOs (Initial Coin Offerings), and the meteoric rise, precipitous fall, and slow climb back up of cryptocurrency prices, it is still very early days. Most of the issues yet to be solved, as noted above, are not technical. It is largely a question of fitting in necessary, real-life legal regulations with new technologies that allow for more freedom in the movement of digital assets. This is the next step of our internet journey – unique digital goods that are not controlled by a central. The potential impact on our society is huge, and governments, industry organizations, and regular citizens need to play a role in shaping the regulations. The Futurist Conference discussed and showed off what is possible, now the question seems to be around how to make it a reality that benefits us all.