The Resolution of the Bitcoin Tokenization Experiment

Article written by Jerry Chan

We have been dancing around the issue of how to use Bitcoin to bootstrap an economy, and thus become money due to simple free market forces, when in fact there are 2 different ways in which this can be achieved, and they come at the problem from separate ends of the spectrum.

Firstly there is the free market one in which we are most familiar is simply what the market will pay in exchange for a satoshi, which @ $150/BSV means that 6667sats will buy 1c worth of economic value. This is the value that does not require any trust intermediaries. This is the trust discounted value of Bitcoin.

But what if you are okay with trusting an intermediary, such as your bank, or your airline, or the securities exchange to broker the value that Bitcoin represents? If you trust your current bank to ‘make good’ on the redemption value of Bitcoin/Satoshis, then you are not tied to using the open market value discounted value of satoshis, but are free to peg sats to whatever value you wish. This is the realm of STAS tokens.

STAS tokens, which was named for its inventor but has a useful backronym that I coined of “Substantiated Tokens from Actualized Satoshis”, is the method by which any issuer can transparently, and openly convert generic unsubstantiated sats (Bitcoin) and turn them into a ‘minted’ token with a legal issuance contract. In effect, the ‘issuance’ of a token, requires a satoshi (sat) to be ‘imprinted’ and transformed into a substantiated satoshi, which has restrictions on its use, and a real world asset assigned to it, backed by the issuer.

This method differs from token layer protocols, as those use differing degrees of separation between the base token unit in Bitcoin (satoshi), and the token units that are issued, effectively creating new token units in layers on top of Bitcoin, and requiring different levels of server/wallet logic to be run on top of it. STAS tokens are not a traditional layer protocol, as it isn’t on a layer build on top of Bitcoin. It is a protocol standard using Bitcoin native script, similar to the Metanet protocol. Therefore it is more correctly described as a Layer-NULL token standard. It is a standard that adds new meaning to a specific individual satoshi by a process that I call ’actualization’, so that it can be provably linked back to an issuer who bestowed it its meaning, and has certain restrictions on its use unless similarly redeemed (converted back) to a generic amorphic satoshi. An actualized satoshi has extra meaning and restrictions beyond the generic sat, given by the issuer. We can say that this satoshi has substantiated value, and is a substantiated native Bitcoin token.

STAS Token is the fix for Bitcoin price volatility, and the way to its mass adoption

What this means is profound. Bitcoin has always been a data carrier commodity. Its value has always been rooted in its ability to convey, store, record, attest, and trade information. Instead of waiting around and hoping that the utility of Bitcoin will raise to the point where the value of BSV goes up (as store of value fans may have hoped for), if you want to shortcut this process, and you trust your bank to be an issuer of your money, then they could simply issue you $0.01 satoshis tokens, backed by your bank account. These actualized satoshis, in your wallet, backed by your bank, effectively are worth 1sat = 1c, which implies that 1 Bitcoin worth of these satoshi would be worth $1,000,050! So for all those who have been waiting for Bitcoin prices to reach 1m USD, well here lies certainly one way to achieve this: introduce a trusted intermediary. This could also be seen as the value of that trusted intermediary’s credit, or its trust premium.

Seen in this way, actualized sats can have pegged values, and the value of Bitcoin appreciates based on its utility value of being a useful vessel for these substantiated tokens, after all there are only 2.1 quadrillion of these vessels available for actualization, and some of these vessels are busy being used as money itself (though at a significant risk-discounted value). The figure below illustrates the value spectrum of the different uses of satoshis, from fully used as money to fully used as asset vessels for substantiated tokens representing real world assets.

Stas Token Solves Bitcoin Volatility Issue
Figure 1: The value representation spectrum of Bitcoin’s satoshis (sats)

Some interesting regions in the above spectrum are:

Value Region Sat Value Comment Notes
(Leftmost ‘money’ side)
Value of 1c
6667 sats Effectively this means that we can charge as low as 1/6000 of a cent for a microtxn (as scale moves the mkt price per txn down)

As BSV/USD price appreciates this ability to represent microtxns go down, at $10000 BSV the smallest USD fee per txn can only be 1/100 of a cent

For Satoshis value to cross into STAS BSV needs to be > $650,000

(Between Money and Tokens)
Avg Txn fee
100-1000 sats This means that most current mkt txns are from 0.05-0.5c USD Looking objectively at block avg txn. (based loosely on market of 200-500sat/kB)
(Token region)
Value of 1 token
1 sat

This means 1 sat could represent a very high value item

The value that the 1 sat token can represent is bound only by the trust and credit worthiness of the issuer.

Table 1: comparison of value regimes for satoshi use cases

Compared to different layered token protocols, STAS tokens are true native Bitcoin. But still, there are those who would argue some unique use cases where a layered (nested or embedded) protocol run on top of Bitcoin may be a better solution. Below we illustrate the use case comparisons of the technologies:

Layer Two (L2): All the logic on external servers, only a proof of execution or events on-chain. Essentially Bitcoin is only used as a storage, event sequencing, and journaling mechanism. This is the “App-layer” of the global computer Bitcoin. Applications include closed loop/closed source token systems such as Air miles, Loyalty points, games, and systems where both the system and the issuers wish to keep ultimate control. Logic is executed off-chain, but the records of the computation are stored on chain simply as data. Source code can be made public, which alleviates some of these criticisms, but then why not just move to the lower layer?

e.g. Tokenized.com, Run, and most historical ‘coloured coin’ implementations

What happens when a server:

  1. ) goes down?
  2. ) is hacked?
  3. ) its owners go bankrupt etc?

Layer One (L1): Logic and data is on-chain, but additional data layer protocols, unrelated to and decoupled from Bitcoin itself are required.  While all the code of the protocol is on-chain, and miner-validated, it is still embedding a new protocol on top of the Bitcoin protocol.  This is the similar to the “Operating System-Layer” of the global computer Bitcoin.  This pushes all the logic to be executed by the miners (processors) of the blockchain, but leaves the task of balance calculation/authentication off-chain for wallets to handle.  Wallets need to specifically know the protocol or data format to be able the correctly interpret the state.

e.g. sCrypt

Layer Null (L0 or a non-layer): Just Bitcoin. Conferring new meaning to Bitcoin native tokens (satoshis) through its inherent embedded script, that each transaction inevitably carries anyway (Turning stem cells into differentiated ones). This is the “CPU-Layer” of global computer Bitcoin. There is no extra logic to process tokens, only the base Bitcoin logic, the only change is that there is a way to provably ‘mark’ or actualize sats to mean something different than just a satoshi. Wallets use the same mechanisms to account for Bitcoins, namely, by tracking UTXOs.

E.g. STAS Token

Technology Comparison Chart:

L0 (StasToken) L1 (sCrypt) L2 (Tokenized, Run.sv)
Token Logic Executed by Mining Nodes Executed by Mining Nodes Executed by proprietary servers
Balance representation Satoshis Account entries in OP_RETURN or PUSHDATA Account entries in OP_RETURN or PUSHDATA
Trust Model Completely Transparent, same as Bitcoin. Verified by all mining nodes Mostly transparent, verified by all mining nodes Obscure, but server code and logic can be published and manually verified by interested parties
Validators Mining network (Transaction processor network) Mining network (Transaction processor network) Proprietary servers, permissioned consortium or open source
External infrastructure required -External issuance mapping lookups
-Minor wallet changes to read Token IDs
-Specialized Wallet modifications to calculate balances -Specialized Wallets
-Specialized Servers
Wallet Standard Open Open/Proprietary Proprietary
Taxability Automatic, universal logic Required extra logic, specific to protocol Requires extra logic and cooperation with token platform providers.
Legal and Regulatory compliance Dependent on trusted intermediaries Dependent on trusted intermediaries Dependent on trusted intermediaries and the token platform tech providers
Issuance Licensing Decentralized, authorities can issue licenses which can be put into the issuance contracts Decentralized, authorities can issue licenses which can be put into the issuance contracts Centralized control of issuers by the technology platform companies
Cost to implementation Low (transparent code and universal data standard) Medium (transparent code, but differing data standards) High (custom logic, and source code)
Developer Tools Few (at present) Few Plentiful (as it is just app level server logic)

Benefits of Layer null tokens:

Some other benefits of STAS tokens can be realized because they do not require any additional processing logic beyond that of basic Bitcoin Script itself, and the fact that the tokens themselves are sats. For instance, we can eventually have many services provided by third parties done automatically once the right set of public keys are revealed. Imagine taxes being calculated automatically by the tax authorities, and levied transparently. Imagine third party accounting and auditing firms being able to work directly off the public block chain to do a company’s year-end filing and reporting. Imagine law enforcement being able to much more effectively track illicit proceeds of crime through the same shared wallet standards that apply across all of Bitcoin.

STAS token is not just a token solution for a specific use case, it is the technology that will work for all use cases. And because it requires no specific server code, and only small modifications to wallets and block explorers and APIs in order to support them, they stand to be the most widely adopted standard.

It is the economic positive feedback effects that interest me the most, because STAS tokens can actually stand to be the ‘killer use case’ that drives Bitcoin use and transaction volumes to the levels that make the network sustainable for transaction processors globally to continue to support the network. It is exactly these applications which will help drive the transaction economy of the future, and what TAAL will base much of its business model upon. It will be the essential cog in the engine of growth, for the Datacosm to come.

Encourages Bitcoin Use over speculation

STAS token is the way to make Bitcoin itself cash. It is the simplest way to make Bitcoin itself used without knowing it is being used.

It is the only token that may be natively integrated into Bitcoin itself without protocol changing. E.g. miners may eventually can start accepting it as a fee, since it is Bitcoin just with meaning attached to it, there would be no need for protocol change.

But most importantly, STAS tokens would create an enormous utility based demand for native Bitcoin tokens (satoshis) and increase the velocity of their exchange which would result in astronomical growth in the amount of transactions of this type and in turn astronomical decline in miner fees for these transactions.

This is the holy grail of the mining/TX processing industry, as it actually brings on the transaction fee revenue economy, at last setting the ecosystem free from block subsidy dependency.

Economically speaking, there are two ways to drive down processing costs:

  1. ) to make as few transactions as possible by packing all the token related data in layers and using native tokens only as a data carrier
  2. ) to make as many transactions as possible and by this drive down the needed per txn costs globally to sustain processors

The first one minimizes Bitcoin use, while the last maximizes it.

Converting SATS to STAS, the token usage is akin cell differentiation in biology. While stem-cells (SATS) have the most potential, they carry with it the most volatility, the value of stem-cells is in their potential to become any other useful cell. Similarly, the value of a SAT and Bitcoin is in its limitless usage potentials. And better than biology, SATS are re-useable and recyclable. Let’s use them, and finally give bitcoin the utility value that will grow its fundamental value and potential into the future!

Nota bene: TAAL earlier announced our acquisition and patent filing of the technology behind STAS tokens in a press release here. At the time we called STAS a layer 1 token solution, but since then and after discussions with experts we have more accurately classified STAS as layer-null tokens (to differentiate them from other layer 1 solutions which have structural differences). Since the announcement, then there has been a mountain of queries from industry participants wanting to know more about our strategy for tokenization and how it fits into our greater business model. This will be the topic of future blog entries outlining why tokenization or the use of actualized sats is pivotal to our revenue model which is based on transaction volume. Stay tuned…

Special thanks to Stas Trock for his contributions to this article