What is Token Economy?

In the world of cryptocurrencies, the Token Economy refers to the economy where goods, services, and other assets have gone through the process of tokenization.  These tokenized assets operate on blockchain technology where the demand for a middleman is successfully eliminated. 

The process is fairly straightforward. The assets are digitized and assigned ownership thus making the token, also referred to as the digital asset, only accessible to those who have been authorized to do so. Then the owner is able to participate in an exchange. 

The token economy is similar to the day-to-day interactions in the physical world except that it’s digitalized, based on assets that are quantifiable, governed by smart contracts, and protected by the science of cryptography. 

There are four tools that allow the management of tokens: tokenization, documentation, governance, and trading.

The tokenization process refers to taking meaningful data and turning it into a line of characters. It enables assets to be expressed as a quantity. During the process of tokenization, the basic units of measure are utilized. They include units that represent time (hours, minutes, seconds), length (meter, kilometer), mass (gram, kilogram), and others. Additionally, owners can classify their tokens as either fungible (divisible) or non-fungible (non-divisible). Blockchain technology records and tracks each digital asset’s ownership and allows them to be securely traded.

Adding an asset’s proof of authenticity and/or any other relevant information on the blockchain is called documentation. The author's signature, hash key (unique identifier), and timestamp are the three main proofs that show when each specific documentation happened and who prompted it. 

Smart contracts take the role of governance by binding specific actions to specific conditions. If these conditions are broken then the actions never see the light of day. In a way, they’re exactly like regular contracts we see every day in the real world. The main difference is that smart contracts operate on a blockchain.

Smart contracts are utilized to establish a set of rules for trading digital assets. Furthermore, these contracts act on their own when the terms and conditions are met on the blockchain. Since they can carry out transactions without any additional prompting, it opens possibilities for saving more time and removing any intermediaries. 

Trading is an important aspect of the token economy. Blockchain technology allows anyone to turn anything into a digital asset while also providing the ability to hold all of these assets in the exact same form. It’s much more simple to trade within the virtual world than outside of it since you don’t have to worry about the logistics of how you’ll get your asset in your hands. In other words, it’s just the process of converting one value into another. If you have concerns about fraud, you can set those aside since, as mentioned above, smart contracts have the ability to make sure the transactions are not completed until every participant fulfills the pre-determined conditions. So schemes like double-spending are stopped before they can do any real damage.