Response to Bitcoin Magazine Article About Tokenization
You can listen to or watch this video here:
On April 6 2023 Bitcoin Magazine published a guest post by Mickey Koss, a West Point graduate with a degree in economics who spent four years in the infantry before transitioning to the Finance Corps.
In the piece, Mr. Koss argued against tokenization of assets on the blockchain, pointing out how they supposedly perpetuate the financial problems that Bitcoin seeks to solve, and highlighted the problem of asset tokenization lack of security.
In this post we are going to respond to this article by arguing in favor of tokenization on the blockchain, explaining its benefits.
The Bitcoin Magazine opinion editorial has 7 paragraphs, and we will respond to each one below.
Mr. Koss Wrote:
“The demand for tokenizing assets like real estate is not a solution to, but rather a symptom of, the problems that bad money perpetuates. Real estate should be reduced to its utility value as a dwelling or place of business, rather than used as a store of value by proxy if we ever hope to solve the growing gap in wealth inequality.”
The emergence and growth of truly decentralized proof of work coins with capped supplies such as Bitcoin (BTC) and Ethereum Classic (ETC) will certainly deflate the valuation premiums that many kinds of assets, including real estate, have accrued due to the irresponsible, political, and corrupt management of fiat currencies.
However, the demand for tokenizing assets has nothing to do with the distortions that the fiat monetary system has created. The tokenization of physical assets external to the blockchain on systems as Ethereum Classic is a change of paradigm of property registry systems.
It is very likely that in the future, all sorts of property records, from real estate, motor vehicles, corporate books, to shipping containers in the supply chain, will be moved to the blockchain.
Mr. Koss Wrote:
“Blockworks highlighted this “advancement” in technology without properly addressing the potential side effects that widespread asset tokenization may cause. In the comments section, tokenization is touted as a means for individuals who are unable to purchase a home of their own to participate in the real estate market. But why are houses so expensive in the first place?”
Widespread tokenization will happen regardless of side effects because blockchains are permissionless. And, tokenization will happen because they are an upgrade to property systems. In regions such as Latin America, Africa, and even in North America, the lack of security of municipal and state property records have been a source of underdevelopment, theft, and extremely high transactional costs.
With its transparency, speed, and low transactional costs, the blockchain promises to significantly improve property registries, transfers, and thus asset markets worldwide.
Real estate tokenization is not about investment or giving access to the “little guy” to participate. We agree with this assessment. Tokens that represent physical assets are about better title systems, with reduced corruption, theft, and confiscation.
Mr. Koss Wrote:
“[Houses are so expensive in the first place] because they are being used as stores of value, a former function of fiat money that is no longer possible due to decades of fiscal and monetary alchemy that has decimated peoples’ purchasing power.”
We agree that houses are expensive in the first place, way higher than their utility value, because of decades of fiscal and monetary alchemy and outright fiat induced corruption. But, this is a problem totally unrelated to the blockchain or where the assets are registered and transferred.
A programmable blockchain as ETC, which is also proof of work and has a fixed monetary policy, is especially capable to take on the task of managing property records. One of the basic problems in impoverished nations are their unreliable registries.
Programmable proof of work blockchains such as ETC solve this by providing an incredibly secure and cheap environment to keep those records with a high degree of transparency and thus accountability. This will likely significantly reduce the problems that have haunted many cultures for centuries.
Proof of work is highlighted above because it is the only true consensus mechanism that makes a blockchain truly decentralized, therefore secure.
Mr. Koss Wrote:
“Tokenizing assets like real estate will only make matters worse as crowds shove money into the market, driving prices higher. It becomes a self-fulfilling prophecy. People buy houses because they know the prices will go up, then the prices do go up and more demand comes in to chase the gains. Every investor following their individual incentives puts owning a home further out of reach for the average citizen. This is not a solution.”
It is not possible to make matters worse by improving the property records system at the national, provincial and municipal levels. Better property systems make better markets and thus better access and prices to the general public.
Indeed, tokenization will likely accelerate the price deflation of real estate assets and homes. This will not only happen because people will save in BTC and ETC, draining home premiums, but because the uncertainty of legal property itself will be removed.
That people are now experimenting with the technology, playing with NFTs, speculating, scamming, and losing money is just the prelude and the training wheels phase of the system. All these activities are only serving as a learning process and showing the abilities of the technology.
Mr. Koss Wrote:
“Furthermore, a “blockchain” is simply a ledger, or record of who owns what. With Ethereum especially, there is no meaningful link to the real world which would allow for native contract enforcement, preventing rug pulls of these token holders. The whole system ultimately relies upon legacy law enforcement and the judicial system to uphold the property rights of these investors — a system that appears to be increasingly hostile in enforcement actions against the crypto industry writ large.”
Exactly! A programmable blockchain is a ledger with a record of who owns what, but in the case of ETC (not Ethereum), incredibly secure.
There is no meaningful link between current systems and physical assets either! We would argue the current systems are even less linked than if assets were represented on the blockchain.
Yes, the whole system will always be dependent on laws and their enforcement. This will never be delinked even for on-chain assets such as BTC and ETC. You may have 1 BTC or 100 ETC in the account you control through your private key, but that does not mean that the asset is your property. Legal property is not the same as physical access and control. The latter is what blockchains guarantee, not the former.
The law will eventually adapt and futile resistance will wither.
Mr. Koss Wrote:
“Bitcoin adoption is fundamentally different, a fact that crypto folks seem to misunderstand completely. Rather than mindlessly tokenizing assets, Bitcoin seeks to fix the monetary issues that drive a desire to do so in the first place. By serving as an actual store of value, bitcoin will drain the monetary premium that real estate has accrued over the past decades due to the broken monetary system. Under a bitcoin standard, housing will ultimately collapse to its utility value, making houses affordable once more to the everyday citizen.”
Mindlessly tokenizing any assets for short term speculation is silly, but the real benefits of transferring and legally recognizing property records on truly secure blockchains will be great for society. The same guarantees that BTC and ETC bring to their native currencies will be enjoyed by these property systems.
That Bitcoin and Ethereum Classic will be used as sound money and as stores of value will definitely drain the premiums of all other assets, but valuation is a different concept than property registration and transfer. Proof of work blockchains provide a new set of guarantees for property in general, including real estate.
Mr. Koss Wrote:
“Tokenization is just another perpetuation of the current system in a faux peer-to-peer wrapper, disguised as financial innovation. Don’t let the new shiny thing distract you from what’s broken. Fix the money, and all of these things become meaningless.”
We agree that there is no innovation in moving property records to a blockchain, just like sound money is no innovation in itself as Bitcoin is an imitation of gold in the real world.
The only two innovations that the blockchain industry have brought to the world are:
Achieving consensus on the state of the property ledger on a global scale in a totally decentralized way through proof of work.
Making the ledger programmable with smart contracts, thus enabling a myriad of applications inside the secure environment of the blockchain.
Due to the above two innovations, the money will be fixed, distorted asset valuations will be solved, and amazing property registries will be widely recognized and used.
Thank you for reading this article!
To learn more about ETC please go to: https://ethereumclassic.org