Is a Blockchain Token an Asset or Opportunity?

November 07, 2017

Every asset can be used as an opportunity if done correctly.

I was recently questioned on my previous ideas on ETH Currency vs. ETH Tokens regarding whether a token might be an opportunity or asset.

My main motivation in the original example was to keep things very high level and tangible for conceptual accessibility. Here I dive into some deeper analysis.

One of the largest issue in creating analogies of “real world” to “blockchain world”, is that you are taking a highly complex system (the open and modifiable system of human economics and exchange) and attempting to compress it into a heavily simplified linear model (a strictly defined and closed arcade game). Needless to say, when we compress, we will encounter some feature loss and hang ups.

Proceeding in this way, analysis really depends on how semantically heavy we want to get. In the context of the pinball game, a life, a round, a play, or a ball are really all the same thing. I’m still exchanging some sort of currency for the experience of enjoyment (service), facilitated by 3, 4, 5, or 12 balls, lives, rounds or what have you.

Analogies aren't great

Analogies lose important and complex details

Here’s my $0.02 on the idea of tokens:

Tokens are simply an abstraction. A unit of accounting that represent I own a fundamentally tradable asset in some context or system.

Suppose that if something has value, then it is an asset to me.

The free choice to decide (opportunity) between two alternatives in an exchange event, wherein a token is consumed on choice, provides a fundamental element of scarcity.

Therefore a token derives it’s value from the fact that I can trade it for something (opportunity), but if I pick this, I cannot have that, and I obviously want both.

Although fundamentally it’s tradable for something else (opportunity), the ability to choose is what has value, and that is what the token is representing — thereby making it (according to my assumption) an asset. Fiat money (as a token of freedom of choice in a broader monetary system) could be argued to act in a similar mechanism.

Blockchain ledger tokens (Bitcoin, Ethereum, ERC20 tokens, etc) themselves provide a fundamental way to programmatically create scarcity (cf. ~ Naval Ravikant). The representation of what that tradable choice is, however, is completely dictated by the system (context) under which the token is applied.

Suppose there exists a casino which never changes its chips. Patrons exchange fiat currency for chips (tokens) which are exchangeable for access to different game services (21, Poker, Roulette). Let’s consider as an agent in this system, I have two different utility functions, fun vs. monetary gain, that I can attempt to strictly optimize.

Agent Agent in a Casino.

Utility Function: Fun

If I decide that I want to have fun, then within this context and under my precepts my tokens represent fundamentally tradable units of fun, let’s say consuming 1 token = 1 fun point.

Utility Function: Gain

If I instead, however, decide that I want to “cash-out” from this sub-system into the broader “real world” monetary system, then my precepts have dictated that my tokens represent fundamental monies (dollars or stores of value).

It is important to note that despite either utility function, the token still has an opportunistic property that allows further potential upside in the form of “winning” more tokens if one participates in the games. However, this property is created as a feature of the service (poker) under the context (casino) in which the tokens are used.

Therefore, despite the opportunity it provides, the token in our example still represents a unit of scarcity and free tradable choice — cash out, play more, trade it for a drink — thereby making it an asset to the agent in the casino.

Returning to the pinball analogy, it is true that I am exchanging fiat currency for lives or rounds in the game, represented by pinballs which I called tokens. Under the context of this game, while a ball is active — it is an asset. With each second passing I continue to trade the pinball (under the understanding that it can’t go on forever — scarcity) for fun-time which I deem as valuable. The fact that I can gain extra lives/balls as opportunities to play more, is an feature of the service. To this end, however, I am still continuing exchange my pinball asset for fun-time.

Disclaimer: Please note that this is an opinion piece and for information purposes only and not be taken as financial, legal or accounting advice. Always consult your trusted advisor, accountant or lawyer when making financial decisions.