A general and standardized token protocol built upon a public, global, immutable, reliable and uncensorable ledger, such as the Bitcoin network, has the potential to contribute significant value to society by increasing market and institutional confidence, reducing legal risks and costs, increasing economic freedom, and lowering the costs of voluntary exchange. All token systems are subject to complex, dynamic and interacting technical, political and economic realities. With consideration of these realities, the most important goal of any token system is that it allows for practical and beneficial use cases. This goal means that the system cannot operate in isolation, but must interact with external human systems in a way that allows the ledger to influence human action.
Tokens are fundamentally different to cryptographic currencies in that their legitimacy as a record of ownership requires a form of ongoing and evolving consensus by the institutions that recognize and enforce property rights. An immutable and uncensorable record of ownership is meaningless if the owner can’t exercise any ownership rights over the underlying property. The simple truth is that no digital ledger, regardless of implementation, is capable of reaching into the physical world to enforce property rights. Therefore, for any token system to gain widespread adoption, it must respect the constraints and concerns of the legal and law enforcement institutions that are the ultimate arbiter of property rights in the jurisdiction to which the assets are subject.
The Tokenized Protocol is altogether contained within the OP_RETURN payload of a standard Bitcoin transaction with the exception of the input and output addresses. Token transactions are validated by issuers using off-chain smart contracts allowing for flexibility and interoperability with any legal or governance system. This architecture gives the potential to create borderless and censorship-resistant contracts that can achieve levels of trust and efficiency beyond what is generally achievable within traditional frameworks. Most valuable tokens require a contract of some form to give legal structure to the token. The Tokenized protocol will provide any entity (issuer) the ability to create their own contract with unique terms and conditions, and give them the freedom to allow other parties (users) to participate in that contract on a permissionless and voluntary basis. However, an important aspect of the design is that the issuer - to whom the contract is a liability - has complete freedom to choose which entities can participate as parties to the contract and that no issuer or token owner is forced to enter into a contract with another party against their will. This feature makes one of the foundational features of a free market - freedom of contract - an intrinsic part of the design.
Note: Where the term ‘Bitcoin’ is used, this document refers exclusively to Bitcoin Satoshi's Vision (BSV). Bitcoin (BSV) is the only network using a protocol that is consistent with the Bitcoin white paper and Satoshi Nakamoto’s original vision.
“Economics is not about things and tangible material objects; it is about men, their meanings and actions.” - Ludwig Von Mises, Human Action
A token system, like Bitcoin itself, is as much an economic system as it is a technical system. In the case of Bitcoin, it is incentivized human action that ensures that the Bitcoin network perpetuates through time and at a grand scale, but only while it continues to provide strong economic benefits for both miners and users. Bitcoin’s economic incentive structure has led to the creation of a globally significant distributed network. A viable token system must support this incentive structure while also ensuring that it possesses a strong and stable incentive system of its own. It is worth reinforcing the fact that the only purpose of a token system is to provide economic utility to both users and issuers. It is therefore critical to truly understand what users and issuers want out of a token system, and that a token system’s design is optimized to maximize utility (or value) for both users and issuers.
A strong focus on optimizing for maximum utility is the core design philosophy of the Tokenized Protocol, and is what separates Tokenized from competing token solutions. Tokenized is unabashed in its design choice to use off-chain smart contracts to keep as much processing and data off-chain as possible. Only as much data as is necessary to ensure that property ownership can be recognized and rights enforced will be stored on-chain, allowing the Tokenized Protocol to foster a compelling token ecosystem for the lowest possible cost to users. The Tokenized model aims to win market share by servicing the majority of use cases and creating powerful economic incentives for rapid adoption in a diverse set of marketplaces.
The Tokenized system operates in full recognition that decentralization, cryptographic techniques and clever protocols are simply tools used by Satoshi Nakamoto to allow the Bitcoin network to provide its users with an immutable, uncensorable, public, reliable and global ledger. It is these properties that give the ledger value. The tools that create this value are irrelevant and can be changed, as long as these essential properties and the incentives are not affected. The Bitcoin protocol leverages these valuable properties to create digital money which is Bitcoin’s first ‘killer app’ - and which is intrinsic to the Bitcoin system as it provides the incentive framework necessary to secure and perpetuate the network through time. This money has incredible utility as a medium of exchange, can’t be manipulated and has a fixed supply, making it an excellent store of value. The Tokenized system leverages the value-giving properties of the Bitcoin network to create a standard system for all of the world’s contracts, financial transactions and commercial records.
While it is important to place the interests of users and issuers at the forefront of the design philosophy, it is also necessary to consider the interests and concerns of all stakeholders that play a part in the success of Bitcoin. The Bitcoin system is primarily composed of users and miners, but it also relies on legal institutions to recognize Bitcoin transactions as legitimate forms of voluntary exchange and on law enforcement organizations to enforce property rights. Legal institutions and law enforcement organizations are critical because Bitcoin may be protected by effectively unbreakable cryptography, but its users are not protected from the logic of violence in the real world. With this in mind, one of the most important design features is to provide functionality to allow authorities some control over property to protect Bitcoin users, and it is unlikely that legal authorities will recognize a digital token system to be a legitimate record of ownership if the token system does not afford them the ability to confiscate assets. In conclusion, it is important to understand and respect the concerns and interests of legal and law enforcement institutions for the benefit of both Bitcoin and token owners.
Like Bitcoin, a token system requires users, miners, legal institutions and law enforcement organizations to work together, however, it also introduces a fifth actor – the token issuer. While token owners are still vulnerable to coercion, token owners also require trust in the issuer. It is important to note that a token represents something of value. That underlying value can be anything including ownership rights to an asset, or the promise of a future good or service, however, it is important to place maximum emphasis on the fact that a token is not value in and of itself, and any token representing something of value is ultimately valueless if the token’s owner cannot benefit from the underlying asset. Therefore, it is critical to ensure that the token system allows the issuer to control their tokens in a way that satisfies their goals while also providing them the ability to comply with whatever rules, terms/conditions, laws or regulations that they choose to comply with.
Societies function because at a foundational level, humans trust each other to behave in a predictable manner. Most of us have a common understanding of both our own motives, emotions and behaviours, as well as those of the people we interact with, and we perceive that understanding to be reliable. So reliable, in fact, that we design our lives around this trust.
We all have an appreciation for the consequences of actions and events as they affect people, and we intuitively know how people will behave in most circumstances. It is this trust that enables us to drive a car on a road at high speed, while strangers drive their cars in the exact opposite direction with only a painted line providing guidance. People feel comfortable with this risk because there is a strong belief - or trust - that others will behave in a way that is self-preserving. This basic truth provides the basis of our entire economic system. We trust surgeons to perform complex and invasive procedures on us, and chefs to cook our food properly. We trust pharmaceutical companies to produce safe drugs, and doctors to prescribe them. We trust pilots and bus, train and taxi drivers to get us safely to our destination and generally, we trust the police to protect us. The function of today’s society is completely dependent on the implicit trust that millions of strangers will behave in predictable, self-preserving ways.
Our modern economies rely on legal frameworks to create and strengthen incentives that help to improve our ability to trust strangers. A general understanding of the consequences of breaking the law provides stability and peace of mind for market participants, and it is the rule of law that allows for people to have the confidence to engage in complex contracts with strangers. Contracts that are formed outside of the legal system - illegal/black market trade for example - nearly always means that participants will have to resort to violence or the threat of violence to enforce terms or conditions that are breached. This is not necessarily because the contracting parties want to be violent - they just have no other means of creating a powerful enough disincentive to offset the incentive to act contrary to what has been agreed. Society utilizes trusted institutions to leverage incentives that help shape behaviour towards a positive outcome for society. This institutionalised trust enriches society, so any system that seeks to improve the way trust is managed must facilitate and enable the wider application of trust in our daily lives.
With these thoughts in mind, it is important to note that trusting the issuer is an intrinsic and inextricable property of all tokens, and that many disputes relating to an issuer failing to honour their obligations can be impractical and/or expensive to enforce.
- Movie/concert tickets
- Financial products (e.g. shares, derivatives, bonds)
- Loyalty points
- Lottery tickets
- Train/bus passes
- Memberships (e.g. gym, club)
All of these forms of value require the liable parties in the contract - the issuer - to honour the terms and conditions of the contract. The value may be derived from a promise by the issuer to provide access to a service, or perform a certain set of actions over time.
An illustrative example is where an investor buys shares in a company with the hope of earning a future return on the investment. Generally, the purpose of a company, set out in the constitution and/or shareholders’ agreement, is to carry on business activities in such a way that profit can be generated and ultimately distributed as a return to all shareholders. In order for this to happen, the management of the company (the administration of the contract issuer) will need to conduct themselves in such a way as to ensure that the business is successful. The outcome is completely dependent upon the skill, integrity, and fortuity of the administration in its fulfillment of the promise. Despite the immutable nature of the contract, it is impossible for the Bitcoin network to ensure that the administrators behave competently and with the best intentions. It is also very difficult to distinguish malicious intent from incompetence, and therefore justice is often not served well when holding management to account for undesired outcomes.
This example serves to highlight how much trust is typically placed on the administration and how ‘grey’ the accountability can be. Prosecuting violations to the terms and conditions of these types of contracts is often not worth the time and cost, due to the inherent complexities and overheads of the legal system. It is the consequences that the market dishes out to the issuer that keeps them acting in good faith. For example, it is fairly obvious as to what would happen if an issuer did not honour a movie ticket, social media would hear about it, and most likely the issuer’s future revenues would be affected, severely. In a tokenized world, with the transparency that the blockchain provides, information around issuer violations of token contracts could be disseminated throughout token owner networks (Twitter, forums, Reddit, Slack, etc.) in a much more transparent way than it can be today. Online complaints can be backed up with irrefutable on-chain proof. The same can be said for a company’s stock price. The collective actions of informed token owners will keep administrations in line and will make breaking the explicit terms and conditions of most tokens unthinkable.
It is with this nuanced understanding of the realities of trust in our society that the Tokenized system chooses to place such strong emphasis on the benefits of using a token system based upon off-chain smart contracts for which the administration takes full responsibility of the basic management. The main reason that trust is placed on the administration is simply due to the nature of what a token is and the fact that adding more trust to the equation through the responsible management of the smart contract does not meaningfully increase the risk of token ownership. For the token system to work, it must be trivial to prove that either the administration or the user has acted in contradiction to the terms and conditions of the contract. The Tokenized trust-but-verify model satisfies this requirement and is a fair, practical, low-cost and simple way to create usable tokens that are suitable for mainstream global adoption.
“No one may threaten or commit violence ('aggress') against another man's person or property. Violence may be employed only against the man who commits such violence; that is, only defensively against the aggressive violence of another. In short, no violence may be employed against a nonaggressor. Here is the fundamental rule from which can be deduced the entire corpus of libertarian theory.” -Murray N. Rothbard from War, Peace, and the State
The Tokenized system will be open to and useful for every man, women and child the world over. Its primary aim is to improve the lives of people by offering them a better way to engage in voluntary exchange, and at a much lower cost than what has been possible to date. A guiding principle towards this goal is to provide universal tools that increase economic freedom. There have been many strong arguments put forward supporting the notion that having high levels of economic freedom is beneficial, and that the advent and widespread adoption of Bitcoin will serve to further increase economic freedom worldwide. These are reasonable conclusions that are supported by empirical evidence, large volumes of credible academic research and common sense axioms.
While there is always the possibility of confusion between causation and correlation with such an argument, the Tokenized Protocol provides flexibility to allow administrations the ability to choose to abide by regulations, providing an environment where different regulatory regimes can compete and coexist. This allows businesses to go where business is most profitable, either due to a particular jurisdiction’s economic freedom, or conversely, where there is a lack of economic freedom, but the right combination of regulations. The Tokenized Protocol therefore allows for more economic freedom, but without requiring it, or hampering useful laws and regulations.
The two pillars of economic freedom are the freedom of contract and the recognition and enforcement of property rights. Every good economic system respects these principles and governments that are sensible, fair and efficient with respect to the administration of laws that support and defend these principles, typically have better outcomes for their citizens. The Tokenized system seeks to improve the administration of these principles in societies across the world by making it easier, cheaper and more transparent to record and recognize property rights through the immutability of the Bitcoin ledger.
Freedom of contract is supported by Tokenized by enabling tools for anyone, anywhere, to create a contract using whatever terms they like with any other person (or persons) in the world on a permissionless and voluntary basis. Where either party does not wish to abide by the laws of the jurisdiction they live in, the censorship-resistant nature of the Bitcoin blockchain allows them to create contracts and tokens that effectively ignore undesirable regulations. While this is done at their own risk, a record of the contract is broadcasted and recorded as safely as a Bitcoin transaction. These contracts can be sent to the ledger from any location from which the Bitcoin network is accessible, and cannot be restricted without restricting access to Bitcoin itself. Issuers are able to operate their own smart contracts or have trusted 3rd parties operate them on their behalf. Bitcoin also allows payments to be made to smart contract operators in countries with favourable regulations.