Financialize everything: security tokens and network effects
The age of the Security Token has arrived. At its core, the “tokenize everything” movement is really about the financialization of everything. This change seems all but inevitable, as tokenization brings much needed transparency, liquidity, interoperability, and automation to the market.
The New Security Token
When people refer to “security tokens,” they generally refer to tokenized:
- Traditional financial assets like stocks, bonds, and other traditional equities as Anexio has done.
- Non-traditional financial assets which include assets that have historically been difficult to trade, like shares or revenue rights to VC funds such as Blockchain Capital or SPiCE VC.
- Non-traditional assets like real estate or art, which are illiquid and often prohibitively expensive to own entire units and transfer ownership rights. Fractional shares in token form make these much easier to buy and trade.
- Rights and schema which can include revenue share agreements, royalties, voting rights, and synthetic derivatives.
The latter three types of security tokens provide perhaps the most opportunity for innovation. Tokenization lets an asset be separated into multiple layers of value. Whether it’s ownership, voting, or rights to future profit, each layer can be parsed out and repackaged in token form.
Many tokenized systems are structured for the creation of communities with strong network effects. The more people who join the network, the greater value the network provides to each of its participants. If you’ve ever heard a token maximalist preach their token’s road to success, you’ve probably heard about network effects. Those are the things that, at first, often sound like a pyramid or Ponzi scheme. But unlike a pyramid scheme, the value that’s added and created moves throughout the network and does not simply return to those at the top. Coinbase’s decision to list Ethereum Classic a few weeks ago was followed by the predictable crypto tribalism and vitriol. These are the marks of budding competitive communities and networks, not simply competing business products. Network effects are translating in brand defense, consumer loyalty, and broadly shared incentives. This is exactly why networks have such potential to create so much value.
Tokenization allows for traditional and non-traditional securities to be more flexible and fluid because they have automated everything from record-keeping to compliance, all considerations that have kept them stuck in centralized depositories.
Tokens that create incentives and communities while also taking advantage of the benefits of a token wrapper will have the best chances of success.