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New Solutions To Old Problems: The CoreLedger Decentralized Token Economy Operating System – OpEd

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Following the rise and fall of Bitcoin and the crypto rush-and-crash of 2017, words like “blockchain” and “tokenization” have entered the mainstream. However, as most people watching, or even participating, in the crypto-mania didn’t actually have a clear understanding of the basic underlying technologies, their true potential was vastly underestimated by the public. In contrast to what most observers believed then, and many still do, the revolutionary power of decentralized systems extends far beyond just digital currencies, that are just one among a multitude of possible applications of the blockchain technology. From healthcare to security and from the mining sector to contract law, the concepts of tokenization and the distributed ledger technology are rapidly finding new solutions to old problems and conceivably forever changing the landscape in many sectors. 

However, perhaps the oldest problems in need of a new solution can arguably be found in the marketplace itself. Increasingly interconnected and convenient as trading activities have become since the advent of the internet, there are still inefficiencies that persist to this day. For example, physical assets are still tricky to trade and the process remains relatively cumbersome, especially when compared to their digital counterparts, as oftentimes they can move slowly, because of their physical limitations in portability. The existing methods of value representation, such as ownership titles and certificates also have significant limitations, as they can’t be used as everyday means of payment being non-divisible and non-fungible, which makes it impossible to just spend a fraction or even find a counter-party that would accept it. Another important and timeless problem has been the common mismatch between a seller that wants to buy good A in exchange for currency or good B, and a buyer willing to pay in another currency or good.  

Such built-in inefficiencies cost time and money, while their impact gets decisively greater in developing markets, where such gaps, limitations and mismatches are even more pronounced. Presenting a viable and straightforward solution to these long-standing issues has the potential to free up resources, minimize waste and, perhaps most importantly of all, help market participants around the globe reaffirm their economic independence and pave the way toward a real free market.

These challenges encouraged CoreLedger and its founders to find practical solutions based on blockchain technologies, mainly by using the concepts of tokenization, fractional ownership and decentralized trading mechanisms. Thus, having worked on and tested multiple applications and technical variations for years, they successfully presented their first working alpha version in Rathaus Zug in December 2017 to a hand-picked audience of 50 decision-makers of Swiss and international companies. The Go-Live of their first pilot project was on the 10th of April 2019. CoreLedger is now working on the market readiness of the key-product: a decentralized trading platform, which will launch shortly, in the summer of 2019. CoreLedger was officially founded in Liechtenstein in March 2017. Today, the company has offices both in Liechtenstein and in Switzerland and the CoreLedger infrastructure and application has matured from a sophisticated decentralized marketplace into an infrastructure able to support global transactions for all kinds of assets: hard and soft, for businesses of all sizes. 

Given the importance of what CoreLedger’s team has already achieved and the potential of these solutions to completely change the way we think about the marketplace and everyday trading, I reached out to Dr. Johannes Schweifer, Co-Founder and CEO of CoreLedger, to understand their work in greater detail. Dr. Schweifer is also co-Founder of Bitcoin Suisse AG, holds a Master’s degree in Chemistry and a PhD in Distributed Computing and Quantum Chemistry from the University of Vienna, while he has worked for over 15 years as a project manager and software architect for enterprises in the IT and financial sectors. He kindly agreed to share some of his experiences, ideas and expectations for CoreLedger in the interview that follows. 

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Claudio Grass (CG): I often find that one’s business approach and ultimate success can be traced back to their personal motivations and own moral compass. What drives you as an individual and what are the values you stand for?

Johannes Schweifer (JS): I always wanted to do something good with my knowledge and abilities. When I helped build a cryptocurrency trading company in the very early days of the Crypto Valley in Zug, I realized that this was not the kind of thing I wanted to do. Trading cryptocurrencies makes some people rich and some people poor, with the intermediary being always on the winning side. That is good, if you happen to be the intermediary, but it does not actually make people’s lives better. Blockchain technology can do so much more than being just a tool for speculation. And I believe its full potential can only be unleashed when as many people and organizations as possible participate. 

The credo of Bitcoin has always been “Vires in numeris”, or “Strength in numbers”. Indeed, the strength of Bitcoin and the blockchain ultimately comes from the number of people using it. Therefore, my motivation and my ultimate goal is to make the technology accessible and available to everyone and anyone, to give people another option besides centralized and controlled structures. For me, as an entrepreneur, as a customer, and as a citizen, having options is important. I would never want to create a system that forces people into using it and it alone. If I had to define my core values, they’d largely revolve around freedom of choice and the freedom to make one’s own decisions independent of any third party.

CG: Could you outline for us the core principles and functions of the CoreLedger token economy infrastructure?

JS: At the core of CoreLedger is the solution to one of the most obvious and inevitable problems that arises out of the limitation of two-party trades.

It is often the case, especially in thinly traded goods and commodities or in developing markets, that a specific good might not be available to a buyer at a specific point in time in exchange for another. For example, one party might be selling coffee and requiring payment in USD, while another party, wishes to buy the coffee but would prefer to pay with gold. This example is, of course, fictitious. Nobody today pays for his coffee with gold, but it just serves to illustrate the problem. You can replace it with whatever asset you prefer.

Multiparty settlement is the key to solving this issue. Of course, every transaction can be done step-by-step, by first exchanging the gold into USD and then buying the coffee. If that is done physically, without tokens, a physical brick of gold would need to be sold for USD. Then the seller has to wait until the USD transaction is executed, and only then can he make a bank transfer in USD to the seller of the coffee and finally get what he originally needed. We are talking days or even weeks of waiting time here.

Tokenization offers a much faster way to do to this. When you tokenize an asset, the token becomes a kind of voucher or coupon for the real asset and you can always redeem the real asset in exchange for the token. Thus, keeping with our example, if all the assets are tokenized and live on CoreLedger, there is no delay. CoreLedger will suggest trade sequences, which first exchange the gold token into the USD token, and then the USD token into the coffee token. Each receiver can at any time use the token as a means of payment to redeem the real asset. The trade sequence runs in a single transaction, which takes just a couple of seconds to complete, instead of days. 

This concept of allowing multiple pairwise exchanges in a single translation offers a great degree of flexibility, while the number of potential connections between assets is vast. Blockchain transactions are not limited to only two parties (the seller and the buyer), but can also run with three or more parties at the same time. That’s a drastic change, enabled by blockchain! And since blockchain transactions are “transaction-safe”, our system allows us to do multiparty settlements with just a mouse-click. Therefore, in the above example, it is not necessary to ever become a holder of the USD, not even for a very short time. For the buyer, the trade is a direct conversion of gold into coffee, even though that explicit trade pair does not have to exist. It is created as a combination of two other trade pairs.

To give you an idea of the scale and capacity of this mechanism: I once drew a chart featuring 150 different assets and about 450 trades connecting them, which might not seem like much. But we calculated over 25’000 different paths on how to purchase the 150 assets with multi-party trade sequences, and if we had not cut off the trade sequence length, we would have found millions. This is the core principle that allows CoreLedger to greatly increase the liquidity of assets and the overall efficiency in trading activities.

CG: What are the practical ways that it improves the way we do business now?

JS: We took this principle of multiparty settlement and turned it into a working infrastructure with a rich graphical user interface, that guides the user through the tokenization and offer-creation process without having to write a single line of code. You simply define an asset by selecting properties from a toolbox and filling in the corresponding values. Then you offer it on the market. This is a decentralized market, without any market makers, without order books or anything that requires a third party. People transact directly from their own wallet into their trading partners’ wallets. If they wish to use security mechanisms, escrow or multi-sign features, additional confirmations or similar tools to avoid human errors, we offer these optional tools, too.

On a practical level, using blockchain has so far been reserved for large corporate players or a niche of nerdy individuals, who have either the money and resources or the technical skills to put the not-so-user-friendly pieces together and create a product or application they can use. However, small and medium businesses need a pragmatic and easy-to-use way to benefit from blockchain technology without having to invest millions in human resources or expensive consulting services.

At CoreLedger, we built our systems in such a way that they are very user-friendly. They do not need a line of code to be written or read. That’s one of the key strengths of CoreLedger. We invest a lot of energy and effort into making blockchain technology and the token economy accessible to and usable by the “blockchain layman”.

CoreLedger is such a pragmatic yet extremely powerful solution to apply tokenization solutions to existing business processes. It simply is cheaper to use the CoreLedger Token Economy Operating System or to use a Whitelabel Marketplace than to build everything from scratch. Furthermore, it allows and facilitates many new business processes, such as fractionalization of otherwise indivisible goods (e.g. cars, real-estate or pieces or art) and auditable transactions, which would otherwise be too small to be booked in normal bookkeeping systems.

CG: The tokenization of real-world assets and fractional ownership applications definitely has great potential across industries, yet, as it is a relatively new idea, it might be hard to visualize its practical applications. Could you give us an example of such a scenario?

JS: Of course. I know someone who runs a business purchasing rare earth metals for his customers and storing them over some time. When his customers want to sell their assets, they can only trade with a handful of market makers. And, as you can imagine, the liquidity of their assets, that are stored in a warehouse, is rather limited. Tokenization changes this dramatically. Instead of getting a piece of paper saying that you are eligible to claim X kilograms of rare earth metal A, you get the equivalent amount in tokens. What looks like a small change for the token holder (he now just gets a token instead of the paper), now offers a huge advantage. Unlike that piece of paper, the tokens are now liquid! They are transactable. And they are fungible. So, let us imagine that Susi and Fred are both customers at the warehouse. If Susi wants to sell 1 kg of metal A, and Fred wants to buy 1 kg of metal A, now Fred does not have to trust Susi. He only has to trust in the token of metal A, and ultimately the issuer of that token, i.e. the warehouse owner, whom he’s already doing business with. 

In a practical sense, blockchain technology and tokenization solve a lot of trust issues and make hard assets much more liquid than they are today. Susi can now even go shopping, using her rare earth metal tokens as payment. That’s an important improvement, which is not possible without tokenization and without the blockchain.

Then there’s also the fractional holding of assets. Practically, it is irrelevant how big or small a claim is. The blockchain treats all claims in a similar way. The warehouse owner has a physical limitation as to how small a fraction becomes until his administrative overhead is overwhelming. There is no such restriction in the blockchain.

CG: Let’s look at a gold-related case, for example, a gold-backed token that allows investors to buy and sell fractions of a physical gold bar. Why would this investment be preferable to the existing gold-backed ETFs? What are the main differences and what are its advantages?

JS: I think the difference here is not in the financial product. Whether these are tokens and therefore digital claims or “paper” claims does not make much difference. In both forms you need to trust the issuer. However, the major difference is the tradability. You can’t just go to the grocery store and pay for your bread with a fraction of an ETF share. At least not as long as the ETF isn’t tokenized itself. But you can do this with a token that has physical gold as its underlying good. You don’t need a third party to trade and transact gold-backed tokens, but you certainly need one to sell your ETF holdings. That’s the major difference and the obvious advantage of a token-based economy. Furthermore, the gold-backed token can be split into tiny fractions, which is important if you want to use it as a means of payment.

All in all, I think the greater benefit is derived from the freedom of choice and the capacity to act without permission from a third party. Additionally, if we think about this in the context of an evolved, decentralized market, with blockchain playing a much more prominent role than today, then the advantage becomes even clearer. Then physical gold would still be the best thing to have, but a gold-backed token will be the next best thing, being superior to a piece of paper or an electronic claim to a piece of paper.

CG: Although it is clear that the distributed ledger technology provides unique assurances on this issue, many of the commonly cited concerns revolve around security and reliability issues. Are there such vulnerabilities that CoreLedger has also considered and secured against?

JS: Quality assurance of the underlying goods being traded was an issue we gave some serious thought to. It’s technically and physically impossible for this to be done by CoreLedger directly, but what we do instead is provide tools that can be used to prove the quality of assets to the token holders. This is done by simply using a credible third-party service to witness that the assets exist and are in the promised condition, and then include that assessment as an “amendment” to the documentation of the asset into the blockchain for the world to see and verify. Such an assessment can be done in regular intervals. If done by a trustworthy and credible third party, then the quality of the underlying good can be ensured towards the users without having to touch it. We simply applied a time-tested, common practice to the token economy. Proven mechanisms, which worked for hundreds if not thousands of years, will also work on the blockchain.

CG: In the coming years, as these concepts gain ground and spread globally, what do you expect will be their greatest positive impact? Also, do you feel they have the potential to have not just an economic, but also a social or political effect?

JS: There are always two sides to every coin. On the one hand, I expect that platforms like ours will greatly enhance the flexibility in how people transact values. Those values can be practically everything, and ultimately this means, that barter – e.g. paying a load of bananas with a load of bricks – becomes feasible and as easy as shopping for groceries. That in turn translates to more freedom and independence for the individual market participant. On the other hand, it also means that we might lose quite a few jobs in the financial industry. I’m not in a position to judge whether those are unnecessary or unproductive jobs anyway, but I would tend to assume so. 

Frankly, I think the future is hard to predict and it’s mostly foolish to try. Nobody would have assumed in 1980 that the internet would become such an essential part of our life today. And yet, here we are. Switch it off, and the world comes to a standstill. One potential impact of our technology – if successfully and broadly adopted – could also be that the dependence on a working internet increases even more. Again, it is hard to judge whether this is a good or bad thing. But still, I’d expect that if the internet actually breaks down one day, there will be far worse things to worry about than a few lost bits and bytes.

CG: Overall, how would you evaluate this great shift towards decentralization that the new technologies of the last years facilitated? Blockchain and all its various applications, the rise of non-state-controlled currencies and transaction systems have all contributed to greater privacy and financial freedom. Where do you expect this trend to lead us in the long run, economically and socially?

JS: Decentralization makes us in theory independent from governments and central banks. Blockchain is however just a tool, and like all tools, it depends on how it is used. Decentralized financial crime is still a crime, so even decentralization needs some mechanisms of control. No topic has been discussed more intensely than this in our company and we came up with a very good solution to it. Basically, our approach is a pragmatic one. We must not and cannot (for technical reasons) impose any restrictions on transactions. But we must and do provide tools with which the issuers of assets can assert control over transactions involving their tokens, if they wish to do so or if they are forced to do so by the regulators. That combines the best of both worlds. Security measures are in place, while issuers, as well as token-holders and -users, can retain their freedom of choice.

In general, I think that systems which are in an unnatural state, like our current financial system, only need a push to relax all the accumulated energy and evolve into something new. Our system today is extremely fragile and only extreme force can hold it in its present, unnatural state. Blockchain technologies can lead to change. And I think that change will happen sooner or later.

CG: What are the next steps for CoreLedger? What are your goals for the next couple of years?

JS: Our main product, the Token Economy Operating System, “TEOS”, has launched. BD300, our first project running on TEOS was revealed to a high-profile audience in Liechtenstein on the 10th of April and is now live and running. It proves that our theories and mechanisms work. It still is some kind of Beta for us, as multi-party settlement is a totally new technology. Everything we learn and all the experience gathered from BD300 will go into the productive systems for the decentralized marketplace and tokenization platform, which will launch this summer. Another project on TEOS, a mobility solution developed by smartmo AG in cooperation with SBB goes live in August. We have established partnerships with some of the major players in the Crypto Valley, and we aim to bring more and more assets into our system. After all, as we mentioned before, strength lies in numbers.

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Claudio Grass

Claudio Grass

Claudio Grass is a Mises Ambassador and an independent precious metals advisor based out of Switzerland. His Austrian approach helps his clients find tailor-made solutions to store their physical precious metals under Swiss and Liechtenstein law. He is the founder of www.claudiograss.ch and recognized as an expert on monetary history, economics, and precious metals. A financial and economic speaker and publicist. He writes about global markets, international finance, geopolitics, history and economics. Claudio is a passionate advocate of free-market thinking and libertarian philosophy. Following the teachings of the Austrian School of Economics, he is convinced that sound money and human freedom are inextricably linked to each other.

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