Many prevailing narratives in the current landscape suggest that Web3 products developed on blockchain technology can confer genuine asset ownership to users through token issuance. For instance, blockchain games have the capability to shift control of in-game assets from game companies to the players themselves, while NFT technology empowers creators with authentic ownership of their creations, leading to enhanced incentives for creators.

Undoubtedly, blockchain technology resolves the custodianship dilemma associated with traditional assets. However, transitioning to on-chain ownership post-centralization has introduced its own set of challenges. These challenges have not only resulted in user rights infringements but have also created opportunities for certain project parties to engage in regulatory arbitrage.

Hence, this article delves into the fundamental aspects of the ownership economy, examining which tokens genuinely represent asset ownership and distinguishing them from tokens that are more centralized and exhibit stronger trust attributes compared to traditional Web2 assets.

Holding tokens does not equal ownership of assets

Many individuals tend to automatically link token possession with asset ownership. Holding the governance token of a project may seem akin to owning the project itself, while possessing an NFT from a blockchain game may give the impression of owning in-game items.

However, tokens do not inherently represent assets. In numerous instances, tokens are akin to the concept of a “ticket” in modern Chinese culture—a versatile medium that can encapsulate various assets. As tokens embody an array of rights and responsibilities, this general medium transforms into a distinct asset class.

Hence, the specific rights associated with a token are pivotal in determining the type of asset it represents. The prevalent market narrative that simplistically associates token ownership with user asset ownership can be somewhat misleading.

Similar to how the value of a concert ticket lies not in the physical paper itself but in the organizer’s commitment to deliver a future performance, or how a bank deposit receipt’s value stems from the bank’s obligation to repay principal and interest at a specified time.

In cases where obligations are unmet, the legal system in place will enforce consequences. This underscores the essence of establishing rights—violations trigger corresponding remedies provided by authoritative institutions to aggrieved parties.

Merely declaring or defining a right unilaterally does not guarantee its existence. Rights lacking enforceable remedies are essentially symbolic and unlikely to be honored by others. This underscores the adage: “A right without a remedy is no right.”

Therefore, without robust protective measures for asset-related rights, it is challenging to assert that users genuinely hold ownership of assets.

Which tokens actually carry ownership of assets?

In the following analysis, we will examine several common on-chain asset categories to distinguish tokens that genuinely signify ownership from those that are essentially centralized assets cleverly packaged.

Governance Token

While Web3 projects do not function as traditional joint-stock companies, the governance tokens they issue are often likened to ownership certificates of the project. However, the reality is that many governance tokens differ significantly from stocks, primarily in two key aspects:

Firstly, the variance lies in the scope of governance. Stockholders typically wield governance rights that allow them to influence decisions on various aspects like personnel and finances. In contrast, governance rights in many Web3 projects are more limited, enabling votes to alter certain protocol parameters but lacking authority to prevent fund transfers from the project treasury.

Secondly, there is a disparity in the execution process. Although governance token holders can propose resolutions, the actual implementation hinges on the project team’s willingness. In instances where project parties fail to fulfill their duties, governance token holders often find themselves powerless.

To ascertain if a governance token genuinely represents ownership of a Web3 project, two conditions must be met: Firstly, governance rights must not be constrained. Any governance rights incapable of dictating the use of the protocol treasury are deemed pseudo-governance rights. Secondly, resolutions passed through governance must be automatically executed on-chain.

While achieving complete on-chain governance is challenging, current off-chain governance execution lacks judicial oversight, leaving governance rights vulnerable. Without effective remedies for rights protection, it is arduous to safeguard rights that lack enforceable measures.

Governance tokens unable to exercise on-chain governance face heightened centralization risks compared to legally protected company stocks due to the absence of legal safeguards. Nonetheless, some Web3 projects successfully leverage comprehensive on-chain governance to decentralize governance rights.

A prime example is seen in the DeFi sector, with Compound exemplifying full-chain governance implementation. Compound’s governance process involves proposals submitted as executable code rather than text for direct computer execution. Upon successful voting outcomes, the governance contract autonomously enacts the coded logic deployment.

This entirely on-chain governance approach eliminates reliance on team compliance with voting outcomes, achieving genuine trustlessness. Consequently, holders of such governance tokens can genuinely secure partial ownership of the project.

game equipment

Similar to governance tokens, while many blockchain game NFTs address the custody issue of in-game assets in traditional games, utilizing these NFTs in games still necessitates the protection of centralized servers managed by the project team.

Therefore, determining whether blockchain game NFTs genuinely represent asset ownership can be simplified to two key criteria: firstly, whether these NFTs are controlled by the game operator, and secondly, whether the fundamental game logic operates on-chain.

The former criterion is typically met by most blockchain games, allowing users to withdraw NFTs to the chain even if they employ a custodial model during gameplay.

The latter criterion is more crucial. Presently, numerous blockchain games run their core logic off-chain due to performance constraints of the underlying public chain. In such cases, alterations to the code by the project team or service cessation can reset user asset functionalities overnight. Hence, games structured in this manner do not definitively grant users true ownership of in-game assets through NFTs.

Addressing this issue necessitates active collaboration from blockchain game development teams and substantial enhancement of the underlying public chain’s performance. Fortunately, several scaling solutions like StarkNet and Arweave are exploring the development of “full-chain games” that deploy primary game logic on-chain. Progress in this direction could effectively resolve the challenge of gamers failing to secure ownership of game assets.

monetary assets

Financial assets stand out as one of the most successful subcategories in realizing user ownership. With claims in financial assets easily programmable via smart contracts, these claim certificates achieve a high level of trustlessness, effectively safeguarding user ownership without relying on off-chain legal systems.

Prominent tokens in this category include Compound’s cToken, Aave’s aToken, and Uniswap’s LP Token (V2 version) or LP NFT (V3 version). Holders of these tokens, representing financial claims, can promptly redeem their assets from the corresponding contract vault as agreed upon. This process eliminates the need to rely on project parties’ adherence to commitments or seek relief through off-chain legal channels.

Furthermore, although centralized stablecoins like USDT and USDC do not resolve asset custody challenges, they operate based on robust trust assumptions (trust in the custodian and confidence in the US government’s non-seizure of custody accounts).

Nevertheless, since entities like Circle and Tether have subjected themselves to a degree of oversight and protection from off-chain legal systems, users’ custody assets benefit from a certain level of supervision and are relatively well safeguarded through conventional means, ensuring the preservation of user asset ownership.

“Chain reform” assets

The above asset classes are all built by native blockchain teams, but in the last two rounds of bear markets, many so-called “chain reform” projects have appeared in the market. The construction method of this type of project can basically be summarized as putting the certificates of off-chain assets on the chain (not real assets on the chain). At the same time, the rights corresponding to these assets basically need to be protected by the traditional judicial system, which of course cannot be done. Complete trustlessness.

Therefore, judging whether such chain-modified tokens can truly grant ownership to users cannot be determined simply by analyzing their so-called token economy, but rather by whether their rights can be effectively protected by the off-chain judicial system. Therefore, although such projects have issued tokens, in essence, they may be more appropriately classified as Web2 projects.

Beware of Conceptual or Regulatory Arbitrage

The extensive exploration of ownership-related concepts here is prompted by the prevalence of conceptual and regulatory arbitrage exploiting ownership notions during the previous bullish market cycle.

Reflecting on the past two years, it becomes evident that governance tokens issued by numerous projects often possess limited governance rights (lacking financial management capabilities), yet the secondary market fervently hypes them based on stock valuation metrics.

Many GameFi blockchain games focusing on the X2E concept rely on centralized servers to execute core game logic. While leveraging token and NFT issuance under the guise of granting users ownership, these projects retain absolute control over the game world’s dynamics. They wield authority to alter game rules at will and freely transfer project funds, effectively merging Web3 advantages (lack of supervision) with Web2 characteristics (centralization) to maximize project party interests.

Such practices exemplify typical regulatory arbitrage behaviors.

In developing a Web3 project, the primary objective should not merely involve tokenizing assets or issuing coins but leveraging blockchain technology to address trust issues previously challenging to resolve. By enhancing trust levels among all participants and reducing trust-building costs, Web3 projects can enhance efficiency significantly.

Tokens minted on the blockchain may not inherently represent decentralized assets; they could potentially be unregulated Web2 assets cloaked in Web3 attire for regulatory arbitrage purposes.

Without prioritizing credit enhancement and solely focusing on token economy design, projects risk fueling financial bubbles and failing to deliver a genuinely asset-backed ownership class to users. In such scenarios, discussions surrounding the ownership economy in Web3 become futile.

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