Tokens and Intrinsicality

The word “intrinsic” derives from the Latin “intra,” meaning “from within.”

Some tokens represent digital items that are intrinsic to the blockchain. Those digital assets are governed by consensus rules, just like the tokens themselves. This has an important implication: tokens that represent intrinsic assets do not carry additional counterparty risk. If you hold the keys for a CryptoKitty, there is no other party holding that CryptoKitty for you—you own it directly. The blockchain consensus rules apply and your ownership (i.e., control) of the private keys is equivalent to ownership of the asset, without any intermediary.

Conversely, many tokens are used to represent extrinsic things, such as real estate, corporate voting shares, trademarks, and gold bars. The ownership of these items, which are not “within” the blockchain, is governed by law, custom, and policy, separate from the consensus rules that govern the token. In other words, token issuers and owners may still depend on real-world non-smart contracts. As a result, these extrinsic assets carry additional counterparty risk because they are held by custodians, recorded in external registries, or controlled by laws and policies outside the blockchain environment.

One of the most important ramifications of blockchain-based tokens is the ability to convert extrinsic assets into intrinsic assets and thereby remove counterparty risk. A good example is moving from equity in a corporation (extrinsic) to an equity or voting token in a DAO or similar (intrinsic) organization.