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The Digital Revolution - Part 3 Tokenisation

Creating tokens has taken the digital world by storm. I can start by giving a few definitions of digital tokens, but I'm sure the definitions by example that come later will be much more useful. OK, here goes.

First, let's make it clear that we are talking about something that is as secure as we can make it these days. Tokenised data is undecipherable and irreversible. Because there is no mathematical relationship between the token and its original item, tokens cannot be returned to their original form without the presence of additional, separately stored data. As a result, a breach will not compromise the original data.

Second, let's clarify what they are. Tokens have no value on their own—they are only useful because they represent something else. A good analogy is a poker chip. Instead of filling a table with cash (which can be easily lost or stolen), players use chips as placeholders. However, the chips can’t be used as money, even if they're stolen. They must first be exchanged for their representative value.

And how do you use these tokens? Now that's where things start to get interesting. Most blockchains require that if you wish to use them, you must use their own form of currency. You pay your usual fiat currency, £ or $, which is then exchanged for the tokens that the blockchain uses, and then you can use those tokens to pay for the services or articles that you want.

Over the past year one form of token has become very high profile. I refer to NFTs, or Non Fungible Tokens. I'm sure you've heard of them, but maybe you've wondered what the heck they really are. Let me try to explain.

First, let's get clear what Non Fungible means. Basically it is something that is unique and therefore can't be exchanged for anything else. For example, the money in your pocket can be exchanged for other money. A five euro note is no different from any other five euro note. One can be exchanged for another. A painting by Raphael cant be exchanged for anything else, it is an individual item which has a value because it is a painting by a very famous painter.

In other words a bitcoin can be exchanged for another bitcoin, after all it can be used as money just like any other bitcoin. An NFT cannot be exchanged for anything else, it is an individual item, and that means there is only one of its kind.

One of the great things about NFTs is that they give artists a very simple way of monetising their goods on the web. Before such things existed there was no real way of copyrighting your work on the web. If you wrote a story, or uploaded a photo or an original painting, anyone could copy the file and use it as they wished.

With an NFT you can still do that, but there is a difference in the way people can consume things. For instance, let us assume you have painted a picture, and exhibited it. It is now hanging in a gallery. Anyone can photograph it and print that file, and then hang the copy on their living room wall. If it gets bought by a museum, the original can be viewed by the paying public. In short, there can be copies (called prints), but there is only one Mona Lisa, or one Venus de Milo.

We are living in a digital world. How do you create a digital file that you want to be unique? And how do you monetise it? It is almost impossible to upload it to the web and still claim it as an original. Someone can, of course, buy the physical copy, but in a digital world how do you copyright a digital file? The answer is, you register it (mint it) as an NFT. If someone then buys the NFT, that is regarded as the original. Copies may still be made, but they will have a value similar to a print of a painting rather than the original.

Recently there have been some interesting twists to this new subject.

First, with the new online games you need to buy tokens in order to play. But that isn't the end of their use. Nowadays you can buy an NFT which is an avatar that stands for yourself in the game. Think of the old fashioned games where you had a red counter, or a blue counter, which you moved round the board. Each player had a different coloured counter. In the digital world, instead of that, you buy an avatar which you then program with some attributes which are individually yours, including a picture of you.

There are also set-ups that allow you to buy digital real estate, which can be your digital home, you can even put a shop on your new-found high street plot, and sell your wares from that digital shop. You could even buy up a whole digital street and rent out blocks.

You can take this pretty well as far as you like. If your High Street becomes successful what is to stop you tokenising that street, and selling off tokens? You have now created the equivalent of a company. With a physical company you can go public and sell shares. With a digital asset you can tokenise it and sell the tokens. Those  NFTs are the equivalent of an old fashioned share certificate. That will now give you some more capital to play with, and the tokens will bring in the equivalent of a dividend based on the rent the High Street is receiving from tenants.
Isn't this fun!

Already footballers and basketball players are tokenising their boots and shirts. You can even split up the item you are tokenising and sell individual parts of these items. Own a hundredth part of a famous player's shirt. Daft, but even more fun, especially for the player who is making rather a lot of extra money.

Live in a nice house? Tokenise it and sell tokens representing a share of the house. When you sell the property, the owners of those tokens get a share of the sale price. But perhaps you had better keep 51% of the tokens for yourself. On the other hand, what a great way to start a property business.
Hold on. I think I'll keep that idea to myself.

Next week I will pursue some of these ideas further.

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