Bitcoin, the first cryptocurrency, introduced a new form of money and became substenquently a novel medium of exchange, store of value and medium of exchange. As its supply is capped to 21 million units, Bitcoin holders were incentivised at first to have a passive behaviour: hold.
With the emergence of smart contract development platforms, cryptocurrencies have a growing number of case studies that are implemented throughout industries.
Just like a coin, a token can facilitate a transactional economy between peers.
On a fictive marketplace called TRADE, users may sell and purchase goods and services by using the token TRADE. Here, the token would be considered as “money” and utilised as a medium of exchange and transfer of value.
Limitations include high price volatility against fiat prices, which may create substantial risks for buyers and sellers.
It can give access to a decentralised application, a platform, a service or a product.
For instance, by holding a fictive token called TRADE, you may be able to access a decentralised marketplace where users can exchange goods and services privately, securely and without any intermediate in the process.
Centralised financial exchanges help investors facilitate the purchase and sale of instruments such as stocks, bonds or derivatives. Tokens could theoritically transfer stock without a broker.
Moreover, investing in a start-up might suggest a cumbersome legal and financial process before the issuance of a shareholder agreement.
Ownership tokens, which are often regulated as under security law, can speed up the issuance and transfer of equity between interested parties.
Tokens can give the right to claim additional tokens as a form of incentivising mechanism.
For instance, a fictive asset management firm might issue a token EARN to its investors. On a quarterly basis, investors might be entitled to return on their initial investment. In this scenario, investors could earn dividends in EARN token rather than in fiat.
Generally, a token with incentive functions also holds medium of exchange functions.
Just like Ether is considered as “digital oil”, other tokens can share similar functionnalities and be used to pay for computational resources. For instance, smart contract development platforms require “fuel” to send and run lines of code on a decentralised virtual machine (computer plugged on the network).
Fuel tokens incentivise developers to deploy efficient code (long code requires more fuel), reduce spamming and attacks.
Decentralised Autonomous Organisation can automate interactions and establish new relationships between stakeholders. As such, a token can grant its holders the power to vote and streamline any decision-making process in an organisation.
For instance, asset management DAOs can issue tokens in proportion to investment.
Token holders can then vote for projects they believe worth investing. Of course, their “vote weights” are pre-determined by the DAO rules, coded in a smart contract.
Similar to governing functions, tokens can help stakeholders interact amongst each other within a tokenised eco-system focused for instance on curating pictures or blogs.
For instance, decentralised social media applications can grant the ability to readers to reward publishers and content creators fairly with tokens.
Such tokens could also facilitate digital media activities such as likes, shares or comments.
Asset-backed tokens are similar to “I Owe You” (I Owe You) financial instruments, a promise of settling a transaction in the future.
In a blockchain context, a token can represent an asset that can be claimed from the token issuer. For instance, one unit of the fictive token GOLD can represent one ounce of gold, and be exchanged digitally between stakeholders without actually moving anything physically.
Asset-backed tokens make immovable assets digitally transferable, however, the token has value only if it can be easily exchanged for the asset. This process requires thorough due diligence and monitoring, as fraudulent projects could easily deny claims on assets.
For instance, if the token GOLD does not facilitate a rapid and easy way to claim a pre-determined physical amount of gold, the token loses its utility.
It becomes an asset-backed token backed by … nothing.
Last but not least, a token can be issued as a proof of payment or donation. In the future, we might receive a token after contributing to a local charity or after paying up our tax dues. In this scenario, these tokens would be useful for compliance and audit purposes.
Tokens can hold a combination of the above functions. We recommend you to fully understand both the token eco-system and the functions of the tokens before purchasing any.
The most conventional and easy to grasp tokens are “ownership” ones. However, such digital assets are considered by many jurisdictions as a security and therefore are regulated by legal frameworks.
It is not because the majority are unregulated today, that they will remain unregulated tomorrow.