Cryptographic Tokens

Native tokens of state of the art public & permissionless Blockchains like Bitcoin or Ethereum, are part of the incentive scheme to encourage a disparate group of people who do not know or trust each other organize themselves around the purpose of a specific blockchain. The native token of the Bitcoin network also referred to as Bitcoin, has token governance rulesets based on crypto economic incentive mechanisms that determine under which circumstances Bitcoin transactions are validated and new blocks are created.

These blockchain based cryptographic tokens enable “distributed Internet tribes” to emerge. As opposed to traditional companies that are structured in a top manner with many layers of management (bureaucratic coordination), blockchain disrupt classic top-down governance structures with decentralized autonomous organizations (DAOs). DAOs bound people together not by a legal entity and formal contracts, but instead by cryptographic tokens (incentives) and fully transparent rules that are written into the software.

 

Role of Blockchain Tokens - ICOs

 

The Bitcoin Network can be seen as the first true DAO that provides an infrastructure for money without banks and bank managers and has stayed attack resistant as well as fault tolerant since the first block was created in 2009. No central entity controls Bitcoin. In theory, only a worldwide power outage could shut down Bitcoin.

With the advent of Ethereum however, tokens have moved up the technology stack and can now be issued on the application layer as dApp tokens or DAO tokens. Smart contracts on the Ethereum Blockchain enable the creation of tokens with complex behaviors attached to them. Today, the token concept is central to most social and economic innovations developed with blockchain technology.

 

Types of Blockchain Tokens - Bitcoin & Ethereum

 

Only permissionless ledgers (public Blockchains like Bitcoin or Ethereum), need some sort of incentive mechanism to guarantee that block validators do their job according to the predefined rules. In permissioned (federated/consortium/private) distributed ledger systems, validators and block-creators may be doing their job for different reasons: i.e., if they are contractually obligated to do so. In permissioned environments, validators can only be members of the club and are manually and centrally controlled. Permissioned ledgers, therefore, don’t need a token. Also, please note that the term blockchain in the context of such ledgers is highly controversial.

 

Type of Tokens

There are different ways to differentiate between tokens. Some of them are outlined below. Please note that Crypto Economics is so new, that we are still in the early stages of exploring different roles and types of tokens. With every new Blockchain and every new application layer we will collectively learn by trial and error of what works and what not.

  • Usage tokens
    A token that is required to use a service. Bitcoin and Ether are the best examples of usage tokens — token ownership does not give you any specialized rights within the network, but it does give you access to the service (the Bitcoin payment network and the Ethereum Virtual Machine in the case of BTC and ETH). Scarce tokens combined with a useful service can create massive value for token holders and entrepreneurs.
  • Work tokens
    A token that gives users the right to contribute work to a decentralized network or DAO (whether on blockchain level or smart contract level) and earn in exchange for their work. That work can be serving as an oracle (in the case of Augur), being the backstop in a collateralized debt system (in the case of Maker), or securing the network (in the case of Ethereum when it switches to proof of stake).

These two types of tokens are not mutually exclusive and some tokens serve as both: usage tokens and work tokens. An example of a token with both characteristics will be ETH when Ethereum transitions from proof of work to proof of stake.  Another way to differentiate between tokens is:

  • Intrinsic, Native or Built-in Tokens
    of blockchains like Bitcoin, Ether, etc that serve as: (a) block validation incentives (‘miner rewards’); and (b) transaction spam prevention. The logic behind this is that if all transactions are paid, it limits the ability to spam.
  • Application Tokens
    With Ethereum, tokens can now easily be issued on the application layer through smart contracts on the Ethereum Blockchain as so-called complex dApp tokens or complex DAO tokens.
  • Asset-backed tokens
    that are issued by a party onto a blockchain for later redemption. They are the digital equivalent to physical assets. They are claims on an underlying asset (like the gold), that you need to claim from a specific issuer (the goldsmith). The transactions as tokens get passed between people are recorded on the blockchain. To claim the underlying asset, you send your token to the issuer, and the issuer sends you the underlying asset.

 

Tokens can represent any asset

  • An hours worth of rooftop solar energy
  • A currency such as dollar, euro, rupee, or GBP
  • A promise for a product in a crowdfund
  • A future download of a song from your favorite artist
  • An insurance policy
  • A ticket to an event

 

Tokens can be used as

  • Token of ownership
  • Voucher to redeem for physical items on platforms that only permit the sale of digital goods.
  • Software license
  • Stock certificates
  • Access rental cars or other vehicles
  • Ticket or access pass (party, concert, amusement park, ect. )
  • Automated road and bridge tolls
  • Access recording studio time, online game, a webcam, a wifi hotspot, to open a locker or storage unit,  to access online storage
  • Customizable memberships or subscriptions
  • Pay per use exercise equipment
  • Crowdfunding
  • Rewards program
  • Financial Instruments
  • Bond issuance
  • Derivatives
  • As a system of voting

 


Legal Status

Blockchain tokens embody the full potential of blockchain technology. In order for blockchains to unfold their full potential with regard to reinventing ownership in the digital realm, the technology needs to be recognized de lege ferenda as a system capable of creating an objectively new ontological category. A new kind of thing, which deserves its own regulatory framework that reflects the unique affordances and constraints of blockchain technology.

 

Further Reading

Crypto Economics, BlockchainHub
A Blockchain Token Taxonomy,
 Florian Glatz
Thoughts on Tokens, Balaji S. Srinivasan
ICOs and VCs here, Fred Wilson
Fat Protocols, Joel Menegro
Cryptoeconomics 101Nick Tomaino 
Tokens, Tokens and More Tokens, Nick Tomaino
Crypto Tokens and the Coming Age of Protocol Innovation, Albert Wenger
Crypto Tokens: A Breakthrough in Open Network Design, podcast with Vitalik Buterin, podcast with Olaf Carlson-Wee
Regulatory discussions, Coincenter
A gentle Introduction to Digital Tokens, Bitasonblocks
Tokens on Ethereum, Consensys

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