Token Economy

The reason why companies struggle to realize the potential of the emerging token or DLT economy is that it is not about innovating a private good, but about innovating a network good, which shares more similarities with public goods rather than private goods. Commercial models generally only address private goods scenarios.

Public goods are also referred to as “collective consumption goods” (Samuelson 1954, p. 387), as they can be used simultaneously while at the same time nobody can be excluded from their use. From that, the principles of non-rivalry and non-exclusion in consumption derive to classify goods (Samuelson 1954).

If a good, such as a token standard, is characterized by non-rivalry, then the consumption of the standard is not interfered with by the simultaneous use of the same standard by someone else. Several entities can use the same good to the same extent under same conditions. If a good possesses non-exclusion properties, then no one can be excluded from the consumption of the good. The ability to exclude someone from consumption is a necessary condition for the supply of private goods. But the ability to exclude someone is not given per se, but by assignment of property rights (Musgrave, 1959, p. 9).

Pure public goods are given if a good fulfills both criteria. The opposite of this is the pure private good, characterized by rivalry in consumption and the possibility to exclude others from consumption: if a unit of the private good is consumed, then it is no longer available to other consumers. Table 2 depicts a classification of pure public and private goods together with possible other combinations. Club goods are characterized by the fact that consumers are excludable and – to a certain degree – that they are non-rivalry in consumption. Typical examples of this category are permissioned public DLT systems where access is only granted if certain conditions are fulfilled. Common goods possess rivalry in consumption, but exclusion is not possible.

Digital goods constituting network standards, such as the internet, can be used anywhere in the world (Shapiro et al. 1998) and, thus, are not restricted to a certain geography of jurisdiction. Hence, the scope and potential application of digital goods is considerably broader compared to physical goods (Choi et al. 1997), which is why the standardization of DLT systems in general and DLT-based tokens specifically is of enormous macroeconomic importance for decades to come.

Digital public goods with strong positive network effect characteristics are called network goods. Network goods constitute quasi-standards as they require a critical mass of significant size which is why one will rarely find them covering just a small market segment (Economides and Himmelberg 1995). DLT systems and tokens based upon them are network goods, which extend the traditional goods classification as illustrated in Table 2, as will be explained in the following and is illustrated in Table 3 (adapted from Beck 2007).

Pure private goods are characterized by perfect competition in all product and factor markets, perfect information (complete, accurate, and freely available) on the relevant prices and characteristics of products and factors, and perfect mobility of all resources. Furthermore, and in a direct distinction to public goods, pure private goods must not have any kind of externalities (positive or negative) in the production and consumption of goods or any other interdependence in consumption between consumers. To guarantee a functioning market, private goods must always have an excludability property, meaning that everyone but the buyer of the good is excluded from its benefits. Some goods have the characteristics partly of private goods (no effects or spillovers on third parties in the case of a pure private good) and partly of public goods at the same time. It is possible for the market to produce such club goods to a limited extent (Buchanan 1965), but not at an appropriately satisfying level for all market participants.

DLT systems can be implemented as permissioned public systems, where access must be granted by a governing body (club network good) or as permissionless public system, (pure network good). In both cases, the collective use is not only possible, but necessary, while the value of a pure public good is not defined or does increase with the number of collective users.

Network externalities can be considered as effects “in which the equilibrium exhibits unexploited gains from trade regarding network participants” (Liebowitz and Margolis 1995). Exploitability gains can only be realized if the same solution is used over the whole network, which is the reason why standardization is important. Network effects exist horizontally among users of DLT systems (direct) and vertically from the availability of supporting products and services (indirect). In both cases, the individual assimilation decision to use a certain DLT system and related tokens affects the assimilation behavior of other market participants. This interdependency is characterized as bandwagon-, herd-, avalanche-, and Veblen-effects (Ceci and Kain 1982; Choi 1997; Leibenstein 1950).

Network-effects-generating DLT systems call for a large number of users in order to generate value in inter-organizational networks. As the assimilation outcome of network goods can lead to multiple market equilibria (Arthur 1983, 1989), a formalized standardization process can guide the assimilation process toward a collectively preferred and stable outcome. As network goods tend to create natural monopolies with strong lock-in effects, it is crucial to define standards for DLT systems that account for economic and societal implications.

As any profit-oriented organization, the existing DLT-based commercial models are mainly focused on maximizing revenue, i.e., aiming for an installed base of users, increasing market share, and maintaining a low operation cost. When an operator of commercial DLT systems considers interoperability with other DLT systems, standards are needed, but also the integrity of the existing commercial needs to be assured. The commercial value for standards can be to engage with a complementing system (e.g., a logistic chain connecting to a finance chain), or a competing solution (i.e., two logistic chains).

In case of cooperation with a complementing system, the purpose is to make the own DLT-based services more complete, e.g., through the exchange of tokens, so that users may find it beneficial to interact and conduct transactions between chains, which in turn increases the number of users of both systems. In case of cooperating with a competing system, the commercial situation is more complicated. While the standards-based ability to cooperate may increase the number of transactions that otherwise would not be possible to generate, the risk emerges that users may migrate from one DLT system to another, thereby abandoning one or the other completely. It will affect the increase in the number of users or even bring about a decrease, by users moving to the competitive solution. A DLT systems standard in this case allows for competition within the same system, among two or more competing DLT systems and token providers.

Nevertheless, similar to the complementary cooperation scenario, it must be avoided that the potential increase of operating costs exceeds the expected possible positive network effects. Thus, it requires comprehensive preparation and risk mitigation strategies developed upfront before one engages in cooperation with a competing system.

Apart from direct commercial models of DLT systems cooperation, there are also indirect commercial models that enable standards-based cooperation among DLT systems. For example, some DLT systems cooperation solutions are based on an intermediary platform, e.g., as Blockchain-as-a-Service (Kernahan et al. 2021) which is a commercial model that has emerged to meet the need for cooperation. An overview of standards-based cooperation forms and related value creation in inter-organizational systems is illustrated in Table 4. The cost of outsourcing interoperability services to a provider should be less than the cost of self-implementing interoperability to other DLT systems.

Where DLT systems interact, the management of user roles, permission rights, and the exchange of tokens indicating ownership becomes more complex. Governance instruments need to be agreed upon in interoperability relations that clarify decision rights, distribution of incentives, and accountabilities between two or more involved DLT and non-DLT systems, enacted on-chain in the autonomous interplay between chains, or off-chain in a clearing and settlement that requires organizational involvement.

A widely used sustainability definition stems from the World Commission on Environment and Development (1987, p. 37): “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. According to Murphy (2012) there are three reasons why sustainability is a so-called wicked problem for which no easy solution exists. First, the consequences of unsustainable practices may be distant in both time and space. Second, successful local micro sustainability initiatives do not necessarily work on a greater scale. Third, numerous sustainability threats require instant change, but different views of sustainability embedded in our society impede fast solutions.

The huge importance of sustainability was recognized by the IS community and led to several calls for an increased contribution (vom Brocke et al. 2013). For example, more than a decade ago a research agenda was already proposed to establish the new subfield of energy informatics, which applies IS thinking and skills to increase energy efficiency (Watson et al. 2010). Yet, the current sustainability situation demands increased efforts and “sustainability should be a core imperative in IS research” (Seidel et al. 2017, p. 46).

The so-called weak sustainability perspective, which is endorsed by many international organizations and nation states, advocates a substitution of natural capital by man-made capital. In contrast, the strong sustainability perspective, mostly endorsed by ecological economists and natural and social scientists, rejects this assumption of substitutability (Daly and Cobb 1989). More specifically, it considers a healthy environment to be the basis for further social and economic development. In response to the manifold environmental, economic and societal problems, the 193 member countries of the United Nations adopted a comprehensive set of 17 Sustainable Development Goals (SDGs) in the 2015 United Nations General Assembly. These SDGs comprise numerous subgoals that include a wide array of environmental and humanitarian objectives (United Nations 2018). While undoubtedly all of these goals are important, the broad coverage of the goals makes it fairly easy to label a specific project or technology application as “sustainable” – especially, if the sum of its impact is not considered and a weak sustainability perspective is taken that allows for the substitution of capital.

Tokens residing on distributed ledgers come in many forms and shapes and offer a huge number of different use cases (Tönnissen et al. 2020). They can be generated at the protocol layer inherent to a specific ledger, in which case they are frequently labeled as ‘coins’, or they can reside on the application layer and are minted by smart contracts. Tokens can represent digital or physical assets and enable alternatives and direct ways of raising capital in the form of initial coin offerings (ICOs), security token offerings (STOs), or equity token offerings (ETOs), with the latter two gaining increasing importance in recent years (Kranz et al. 2019). Tokens can also cater for payment purposes as a digital representation of value that is not created by a central bank and utility tokens grant access rights to specific services. Core characteristics of tokens are the ease with which they can be created and distributed. In many cases, they enable a direct interaction between token users and token creators, which facilitates complex market structures by avoiding intermediaries. Considering the numerous forms that tokens can take, it is not surprising that many of their (envisioned) use cases can have an environmental, social, or economic impact.

The most notorious association between distributed ledgers and their environmental impact is presumably the huge energy consumption of Bitcoin, caused by the underlying consensus mechanism using proof-of-work (PoW) that is required to secure the public and permissionless distributed ledger using automated and decentralized governance. An objective and thorough assessment of the total environmental impact of Bitcoin in light of its (envisaged) societal benefits goes far beyond the scope of this brief discussion but is urgently needed for a comprehensive and fair evaluation of its total impact (Sedlmeir et al. 2020). At least, this example illustrates how the manifold positive effects of a cryptocurrency do not come without detrimental side effects, both of which can be easily assessed in terms of sustainability. In this regard, it is also noteworthy that alternative consensus mechanisms exist or are currently under development that might serve as alternatives or supplements to PoW soon. It is therefore crucial to point out that DLT, or, more specifically, its mix of fundamental building blocks, including linked timestamping, digital cash, proof of work, byzantine fault tolerance, asymmetric cryptography and smart contracts (Narayanan and Clark 2017), is under constant development, and every use case needs to be assessed regarding its specific implementation and outcomes rather than asserting that the whole token economy will exert a specific impact on sustainability.

Considering the lack of specificity of the fundamental concepts surrounding distributed ledgers, the question arises of whether the use of tokens can substantially contribute to a more sustainable development in the first place, and, if so, how such an impact can be objectively assessed. As a gross classification, two types of use cases need to be differentiated, namely those that provide an improvement over the current status quo and those that would be impossible without an underlying token.

In the first group of use cases, tokens act as moderators that make the current flow of operations smoother and, in doing so, create a positive effect on sustainability. An exemplary use case represents the trading of CO2 certificates where carbon credits are converted into tokens that can easily be traded via a distributed ledger. The facilitation of trading in combination with increased transparency is supposed to yield several positive outcomes. For example, the efficiency of decentralized trading platforms can make peer-to-peer trading viable and allow for trading of energy within urban neighborhoods. Additionally, enhanced transparency can help to create a system that is less prone to fraud and is resilient against, for example, manipulation of measurements, sale of faked carbon credits or the theft of such credits. The security of distributed ledger tokens thus prevents many fraudulent activities and presents a solution that is robust to fraud (Lockley et al. 2019).

Another example is the application of tokens in supply chains to improve transparency and yield desirable effects such as improved food safety, reduced food waste, and provable fair labor conditions. In this context, tokens representing assets constitute an important building block of a more comprehensive concept that is labeled “Physical Internet”. This concept aims to combine physical, informational and financial flows to create value chains that operate with highest possible efficiency, flexibility and productivity. The resulting gains pertain to environmental (e.g., reduction of emissions), social (e.g., fair working conditions and wages) and economic (e.g., fair sharing of revenues) sustainability (Treiblmaier 2019).

Taken together, all these positive effects would be much harder to achieve without an underlying distributed ledger and digital tokens that represent specific assets and allow for an easy tracking and tracing of physical and data flows.

In the second group of use cases, tokens provide a ‘conditio sine qua non’. An example is the creation of a monetary system that prioritizes financial inclusion and the provision of a stable monetary supply that fosters long-term economic development. History has shown that in the long run governments and central banks cannot resist the temptation to increase the monetary supply with the goal to support the economy in case of a recession, but also to bail out banks and finance war (Ammous 2018). The consequence of such an increase is usually a fall in interest rates which should increase economic activity but regularly also causes inflation. An economy in which the money supply is regulated by code rules out all temptations to interfere with the monetary system, spawning numerous positive and negative implications. The former help to create sustainable societies from an economic and social perspective.

The potential of DLT does not stop here, as is evidenced by so-called demurrage currencies in which the value of the respective token loses value over time. This is intended to encourage spending rather than hoarding currency in order to support the economy and human wellbeing (Leonard and Treiblmaier 2019). On a small scale, experiments with demurrage currencies have shown positive effects on communities in Austria and Germany during times of recession in the 1930s but they were never applied on a large scale due to lack of scalability and, even more important, strong resistance from the Austrian central bank. Of course, this example should not be misunderstood as a recommendation to try out a rather untested and potentially risky monetary system but should serve as an example of how technology might enable visionary ideas whose realizations have so far been impossible from a technical perspective. Other use cases, which might sound less disruptive, include the transformation of market structures caused by disintermediation, as is currently happening through the tokenization of value networks (Lohmer and Lasch 2020).

Given the growing popularity of DLT and token economies, it is foreseeable that a substantial number of upcoming studies will investigate the application of tokens to create a more sustainable future. While this development is laudable, it is also crucial that every study clearly describes both positive and negative effects which result from the deployment of tokens.

Rather than simply labeling a specific token project as sustainable and highlighting one specific sustainability dimension, the sum of all external effects needs to be described as thoroughly as possible. For example, tokens that allow for financial inclusion, but rely on public DLTs using a PoW-based consensus mechanism might help to alleviate poverty (SDG1) and reduce inequality (SDG10), but simultaneously might not be energy efficient (SDG12) and, thus, have a negative impact on climate change (SDG13). Chances are that in most cases such trade-offs cannot be avoided. Obviously, this should not stop the industry and academia from developing and applying token-based solutions for pending problems and researchers from investigating how the token economy can help to improve sustainability. Rather, an open and critical discussion is needed which includes the positive and negative effects that a specific (token-based) solution creates. A comprehensive research agenda for the impact of token economies on sustainability thus necessitates a common understanding of the core terms, the development of measurement tools that allow for the comparability of use cases, and the creation of agreement on what sustainability actually means and which of its many dimensions deserve priority.

A major driver of tokenization represents the prospect of lowering transaction costs, which is similar to historic expectations for most digital technologies (Ciborra 1983; Cordelia 2006): The handling of a digital medium in general causes lower cost than the handling of paper during a transaction. It is worth noting that this also holds true for distributed ledgers: Presumed problems regarding their energy usage and thus cost are questionable (Sedlmeir et al. 2020), especially as reduced paper handling might even lower resource usage in several use cases (e.g., Jensen et al. 2019). However, according to public discussion, most hopes are especially set on the potential to avoid the transaction costs caused not by paper handling but by intermediaries.

Digital currencies, security tokens, digitally signed documents, digital tickets, and even verifiable credentials can, in principle, all be implemented without advanced cryptography but with the help of intermediaries. The banking system already provides for digital money transfers or custody without any tokenization. “Login with”-offers by companies like Apple, Google, or Facebook already provide verifiable credentials.

However, all of these solutions rely on some degree of trust in intermediaries that take on the role of a TTP. Besides their operating cost, their proprietary solutions often lack interoperability from a technical or regulatory perspective. Competing intermediaries moreover will avoid integrating their respective solutions, which would lead to different incompatible standards. Finally, intermediaries build a business model that either directly or indirectly monetizes their role as a TTP (e.g., through fees or monetization of collected data). With the hope to replace TTPs by tokenization comes the hope to remove the costs of intermediaries.

For the traditional financial sector, already Allen and Santomero (1997, p. 1462) suggest that the “emphasis on the role of intermediaries as reducing the frictions of transaction costs […] is too strong.” They further outline that “reducing participation costs, which are the costs of learning about effectively using markets as well as participating in them on a day-to-day basis” is “an important service provided by these firms”. As they see it, a major role of financial intermediaries is to help customers to “deal with the increasingly complex maze of financial instruments and markets”. Coming from the finance discipline, they especially point to mutual funds as one means to reach this goal. As of today, financial service providers could, however, also reach this goal by offering services to their customers that use modern IT, for example, data analytics to identify investment opportunities that match consumers’ needs. Intermediaries’ role of enabling consumers to participate thus does not depend on the role of being a TTP. Intermediaries’ role of enabling consumers to participate is moreover unlikely to vanish with tokenization.

Lowered transaction costs might even enable use cases that were costly and cumbersome to implement using traditional means. In the financial sector, tokenization could increase the granularity of tradeable investment products. With tokenization, financial markets could evolve from trading stocks of a whole company (e.g., car manufacturer) to investing into individual projects (e.g., electric vehicle division) or even individual production machines (e.g., battery assembly). New market segments of investors could become interested in participating in financial markets, for example, when fans cannot only buy the stock of a publicly listed football club but can even directly co-fund the contracts of single players. In all these scenarios, we will need intermediaries that enable investors to participate, not only in terms of regulatory compliant market access but also to deal with the increasingly complex maze of tokenized financial instruments and markets.

Future intermediaries need to determine, for example, adequate market prices through (sensor) data analytics around production machinery or football players. They will furthermore need to understand new market dynamics that come with utility tokens that are not only an object of investment but also a consumable means to run a service (Drasch et al. 2020). Finally, it is possible to store valuables like gold or security papers in your own safe. However, many people will value the professional custody services of a specialized company—for digital and non-digital assets. Dan Schulman, president and CEO of PayPal, described their motivation to offer services around cryptocurrencies as “the opportunity, and the responsibility, to help facilitate the understanding, redemption, and interoperability of these new instruments of exchange” (PayPal 2020). Hereby, Schulman basically restates Allen’s and Santomero’s argument around intermediaries and participation (1997, p. 1462).

This look into the financial sector is, however, without loss of generality: Consumers will also need to store other kinds of tokens, for example, verifiable credentials for their passports, drivers’ licenses, or university diplomas. Again, it would be technically possible for the users to store these on their personal devices. Still, functionalities like providing secure and easy-to-use backups or multi-device access could be business opportunities and, thus, new roles for intermediaries.

Both the internet and the world-wide web were initially perceived to aim at decentralization (Mathew 2016). The Mozilla Foundation’s Internet Health Report (Mozilla Foundation 2019, p. 98) criticizes, however, that “the digital world is dominated by eight American and Chinese companies: Alphabet (Google’s parent company), Alibaba, Amazon, Apple, Baidu, Facebook, Microsoft, and Tencent. These companies and their subsidiaries have outsized control over the internet.”

On the background of an originally decentralized character of the internet and its later centralization, we cannot be sure about the effects of tokenization. Reasons for the internet’s centralization are presumably economies of scale (De Filippi and McCarthy 2012) and platform ecosystems (Tiwana 2014). While tokenization promotes decentralization at first sight, it might as well lay the ground for new centralized business models. Are we sure that a token economy is not prone to economies of scale and the mechanisms of platform ecosystems? Tokenization will create another economic playing field for both, established players and newcomers in the online world – possibly leading to centralized market structures again.

To sum up, tokenization will further lower transaction costs. As intermediaries lose their role as trusted third parties, they need to refocus on market roles that benefit from the lower transaction costs. Facilitating market participation will be a promising role for intermediaries. This might again lead to centralized market structures.

Being successful in this environment and in the long run will require openness towards technical innovation and strategic foresight. Research in the BISE/IS field is in an ideal position to analyze in detail the market dynamics in various industries that face the effects of tokenization. The BISE/IS community can thus strongly support businesses in strategically positioning themselves in a token economy.

New globally and directly accessible marketplaces for tokens are emerging (e.g., tZERO, OpenFinance Network, Börse Stuttgart Digital Exchange). These marketplaces can serve as a secondary market for previously issued tokens. DLT takes over the tasks of brokers and guarantees the security and transparency of transactions. Institutional and private investors worldwide can connect directly to token marketplaces via customer-specific interfaces without brokers as TTPs and the associated costs. Depending on the legal framework, a marketplace can also provide processes for proving the identity of customers and measures to combat money laundering. Preliminary verification of available financial resources is unnecessary, as the exchange of money for tokens between buyer and seller can take place in near real-time. These aspects could make brokers as we know them today obsolete in the process chain.

Tokenization might help to break up established monopolies regarding settlement and custody of traditional securities trading and enable leaner processes. If the receivables, liabilities, and delivery obligations of market participants can be displayed and viewed at any time on the ledger, DLT could replace the clearing house and reduce settlement and counterparty risks. Clearing and transfer of tokens could be done almost in real time via the distributed ledger. In that case, a special custody instance would no longer be necessary for digital assets – everybody can take care of the custody of their tokens themselves if they wish. The DLT assuming the tasks of the clearing house and eliminating the need for a custody instance results in a leaner overall clearing and settlement process.

In the future, the tokenization of assets could open completely new possibilities for (private) investors. For instance, tokenization might allow investments in fractions of real estate, in pieces of art, or direct investments in individual projects of companies. Tokenization may create liquid markets for previously illiquid assets and could offer investors secure access to investment opportunities that were previously not available to them.

However, there remain significant challenges that slow down the tokenization in financial markets. A major challenge regarding security tokens are regulatory uncertainties. As a digital equivalent of securities, security tokens are subject to capital market regulation. The various elements of the typical investment value chain, from issuance over trading to custody, fall under the extensive regulatory framework for equities, such as the Prospectus Regulation (PR), Markets in Financial Instruments Directive (MiFID II), Markets in Financial Instruments Regulation (MiFIR), and Central Securities Depositories Regulation (CSDR). The classification as regular securities results in trading and ad-hoc obligations, among other things (Blandin et al. 2019). However, there still is no clear token taxonomy, especially regarding the regulation of hybrid token forms. Furthermore, other important regulatory foundations are missing to enable security tokens to exploit their potential as efficient, flexible and fungible digital assets (Nägele 2020). While important legal aspects with regards to the trade and transfer of security tokens are still awaiting clarification, first issues have already been addressed within the European Union. To foster innovation, the European Commission has proposed the DLT MTF Pilot Regime. This sandbox enables tokenization without necessarily applying all of the listed capital market frameworks in full. The implications of this sandbox for the final regulation of security tokens are not clear. On a national level, the German legislator, for instance, is working on security token regulation by gradually opening securities law to digital securities, with the digital global certificate joining the previously mandatory physical certificate. However, the so far considered new regulation, which is mainly applicable for digital bonds, might not be sufficient, since shares and other securities also would need to be considered in order for issuers and investors to gain access to the full range of financing and investment opportunities in the digital world.

To summarize, tokenization has a huge potential to transform the financial sector and to improve the investment process by reducing complexity and increasing investment opportunities. However, to realize this potential, regulators will need to address a number of existing regulatory ambiguities, such as uncertainties around token taxonomy and the implications of regulatory pilot regimes.

The automotive industry has traditionally evolved as a vertically integrated value chain rooted in need to integrate every aspect of the process for mass production and to become an economy of scale. However, since the 1930s, the automotive industry’s degree of vertical integration declined and the automotive industry evolved toward a more decoupled, decentralized business network (Langlois and Robertson 1989). Coase (1937) contrasts the difference between markets, where a pricing mechanism governs resource allocation, and firms, in which the entrepreneur and managers coordinate production. Firms remove the friction of complicated market structures and, thus, reduce transaction costs. A firm emerges when coordination can be done more efficiently in a central organization. The balance between centralization and decentralization is continuously evolving as technologies (e.g., DLT) reduce coordination overheads, and customer needs and organizations change. For example, the four ACES trends (i.e., autonomous, connected, electric, and services; Holland-Letz et al. 2018) impact the automotive industry leading to reconsiderations of vertical integration, particularly concerning the software (Fletcher et al. 2018), data, and energy storage. In other areas, token-based ecosystems may allow for more flexible and decentralized automotive value chains (e.g., for commodity parts).

This dynamic, unpredictable landscape of varying relationships between partners in the automotive value chain led toward the rise of business ecosystems that provide some coordination and reduce the transaction costs compared to markets (Pidun et al. 2019).

Automotive supply chain networks are vast and involve many partners distributed across the globe. At the same time, there are many manual and paper-based processes hindering efficient cross-organizational collaboration. To address these challenges, we evaluate tokenization and DLT regarding their usage across the entire automotive value chain, including supply chain management, logistics, and vehicle-related services (e.g., driver license verification or charging services; Garrido et al. 2020; Gudymenko et al. 2020).

In the following, we focus on the challenge of supply chain transparency. Because of their complexity, supply chain networks often lack transparency and trust. Keeping track of all components, materials, orders, and locations is challenging. As described by Lacity (see Sect. 4), due to the many stakeholders and systems managed by these stakeholders involved, no global view of all data exists. In case of issues, this typically leads to highly manual and error-prone reconciliation processes.

To address these challenges, we developed Partchain (Miehle et al. 2019), a system for enhancing vehicle components’ and materials’ traceability within complex international supply chain networks. The objective of Partchain is to enhance supply chain visibility and ensuring the authenticity of every component. Partchain uses distributed ledger technologies, in particular Hyperledger Fabric, and can be deployed on different infrastructures. While traditional supply chain systems shield data between the different parties, Partchain provides a unified way to share and verify data.

As described by Lacity (see Sect. 4), tokenization requires UIDs for representing physical assets as non-fungible tokens. A challenge is the definition and standardization of the UID format trading of the versatility of the key, for example, by using a natural key, a synthetic key, or a composite key. A natural key is based on attributes that exist in the real world and allows for easier process integration because it contains critical identifying information that can be used without further queries. In Partchain, we utilize synthetic UIDs generated from the hash values from individual components’ serial numbers. The UIDs are associated with other meta-data, such as the manufacturing date and location of the asset.

Initially, we focus on the traceability of original components to reduce the manipulation risk and fraud and improve the diagnostics of part issues. We utilize flexible and extensible data models that allow the tracking of complex hierarchical component data. Generated tokens are passed on from partner to partner, including the OEM in the final stage. Every participant in the system can generates a new component tokens (i.e., a record for describing component attributes, in particular serial number, manufacturer, location, and data). Component tokens reference all components that were used for assembling the component.

An important requirement is the ability to authorize access to the data. For example, it is essential that only the data owner can control access to the data she provided on a very fine-grained level. For this purpose, we utilize Hyperledger Fabric’s private data collections. Currently, access to a record is only granted to immediate neighbors in the value chain.

In the future, Partchain can be extended to support traceability and full transparency for raw materials from mine to factory. For example, materials like cobalt or wolframite often originate from sources in developing countries, making it difficult to monitor, for example, working conditions, quality, and standards. As supply chains involve many intermediaries, tracking and verifying origins of all components is challenging and prone to fraud. To digitize the existing practice of paper-based proofs, the ability to create digital tamper-resistant proofs (e.g., certificates) plays an essential role. To support this use case correctly, self-identification methods, such as chemical fingerprints, are critical building blocks (see Sect. 4).

The number of use cases and opportunities in the automotive realm for tokenization is vast. However, there are significant technological and business challenges that hinder the uptake of this technology. First, IT systems are still designed for end-to-end, vertical processes, and not business ecosystems. In practice, this often means complex onboarding processes and many one-to-one instead of network transactions. With the availability of clouds and distributed ledger technologies, the technological means to digitize and optimize the automotive value chain are readily available. While we demonstrated the scalability and maturity of distributed ledgers (Sedlmeier et al. 2021), various challenges remain, including the technological integration of distributed ledgers with the legacy systems of individual partners, standardization of data formats and protocols, finding and implementing balanced incentives that encourage participation in and governance of the ecosystem.

While systems, such as Partchain, demonstrated the suitability of distributed ledgers for securely exchanging and verifying components’ data, they still need to show their ecosystems’ viability. A first critical maturity level is achieved by establishing a digital token for assets. This can provide the technological basis for the digitization of additional value streams in the future. However, achieving a critical mass of partners and activities is challenging; the initial costs for technological integration, lack of standards, governance, operating, and business models slow the adoption. Balancing the needs of ecosystem participants and users, technology providers, and governance entities is challenging and requires the reconciliation of competing interests. Finding the right incentive models that work across the partner ecosystem, thus, often requires intensive experimentation.

While the long-term and strategic benefits of token-based ecosystems are apparent, creating ecosystems is challenging in practice. While online service providers can easily pursue platform-based business models (see Sect. 5), blueprints for decentral ecosystems do not exist. Often, platform providers can subsidize the initial use and adoption of the platform. After establishing a network effect, the platform provider can monetize its user base by facilitating and controlling supply and demand (Hein et al. 2020).

In decentralized ecosystems, incentive structures are more complicated. Conflicting interests, long standardization and governance processes often slow down the creation of vibrant ecosystems. A successful approach requires the confluence of the use case, standards, technology, and governance model. Thus, it is critical to define an appropriate tactical approach for incrementally working towards ecosystems and adapting, if necessary. It is instrumental to develop the ecosystem in a business-centric way and to emphasize shared benefits of all participants, ensuring that the token-based ecosystem continuously moves forward.