Way back in 2013, before phenomena such as Bitcoin, Ethereum, blockchain, and smart contracts had reached the mainstream lexicon, the concept of social currency, or having the ability to monetize from one’s presence and activity on social media was a pipe dream. Since then, we have seen many different iterations of this concept over the years: the “work” put into generating views and ad revenue for a website then rewards the user with the ability to purchase real or virtual items in the site’s ecosystem of products. There is one huge problem with this model, though. The glaring reality is that nothing really beats cash. A $50 store credit is not as good as $50 cash no matter how pervasive the store is. On top of that, as an almost 10-year resident in the “crypto-space,” I will be the first to admit that most attempts at bringing the social currency concept to the mainstream never really take off. The mechanics behind most of the schemes are much too complex and too ambitious in their attempt to overhaul social behavior all at once.
In 2021, I wrote an article about how software developers could exercise a greater amount of flexibility, control, and transparency with licensing through the use of smart contracts. With the boom of NFTs, never mind the fact that the average user doesn’t even understand what they’re buying. What is to be celebrated is that for the first time, the technology utilized (like simply owning a crypto wallet) is being seen as an absolute necessity to be able to buy that CryptoKitty.
The world of asset tokenization is experiencing a similar roadblock much like the social currency problem described above. The ability to tokenize an asset is nothing new. Since 2017, anyone could register and generate an LLC operating agreement and distribute its shares all using smart contracts. Forward-thinking real estate firms are tokenizing rental properties, allowing token holders to receive monthly profits and trade and sell their tokens on a secondary market(commercial real estate too). But when it comes to raising capital for a business, the question remains simply: why would anyone (speaking of the average person) choose to tokenize a business? The current system works fine, and certainly well enough not to take a risk on an unproven technology. As a matter of fact, if you are seeking to raise capital for a multi-million dollar business idea, the people with the kind of money to be able to finance your idea already know what they’re doing. Why would they do anything different? The truth is, the concept of tokenization simply isn’t practical.
With perhaps one exception…
Creating a business is a lot like creating a character on The Sims. You get to control where they are born, what they do for a living, who their bosses are, and even when (or if) they will die. A business entity can be formed to serve any legitimate business purpose. Business entities are formed for the purpose of acquiring property. Businesses are formed for the purpose of making a movie. A business entity can be formed for a very specific purpose or a very vague one. Most people (non-lawyers) have a very narrow perception of what a business actually is.
As such, most people (and many start-ups within this space) fail to see the true potential in tokenization. NFTs are barely the tip of the iceberg. To illustrate this, imagine wanting to launch a global clothing brand but not having the money to advertise, produce, and distribute on a wide scale. Barrier to entry is very low, and your brand fails to stand out from the infinite sea of others. Similarly, you are unlikely to raise the amount of funds you need on Kickstarter, Indiegogo, or any other type of traditional crowdfunding platform. What you can do instead is tokenize your company, and distribute tokens in the amount you need to fundraise. Unlike a cryptocurrency like Bitcoin, that token attaches certain rights and responsibilities, just as an signator to a business would agree to. That token entitles the supporter to a share of your profits (which is their primary incentive for supporting you), and that token can also be sold for any agreed upon amount in a secondary marketplace, and it can even be bought back by the original promoter of the business entity for an agreed upon amount. In this way, a person can tokenize events, product launches, real estate acquisitions, etc. with access to a global pool of investors with a vested interest in seeing you achieve that goal.
Now, for perhaps the first time, crowdfunders are financially incentivized to bet on the underdog in the same way that they bet on Dogecoin or Shiba Inu. In other words, people are incentivized to scavenge for the undiscovered gem with the potential to explode into a monolithic success some time in the future. At the end of the day, that’s what most of us love about crypto anyway.
