A brief classification of tokens
During the past year, ICOs have literally exploded in numbers, and the discussion when talking with founders and investors boils down to what kind of token is the one marketed. I have analyzed dozens of ICOs while written close to a dozen whitepapers. The most common confusion is what kind of token is discussed or how it actually brings value to the industry. The article here below (briefly) sums up the two main token classes and their scope so you can easily analyze what’s pitched in front of you next time.
There are two main types of tokens generally accepted when discussing blockchain:
- Protocol Tokens (PTs) — governed by a coded protocol. The underlying blockchain technology enforces the rules of the protocol. They are generally not linked to any centralized entity or any traditional real-world assets, such as fossil fuels, precious metals, etc.
- Traditional Asset Tokens (TATs) are still dependant on traditional financial and legal systems, representing a traditional asset or precious metals.
A protocol is typically referring to a set of crypto-economic rules that maintain distributed consensus across a peer-to-peer network, put, the software that governs rules, operations, and communication between network nodes. Given this explanation, there is, with very few exceptions, one protocol per blockchain and one native token per protocol. Protocol tokens benefit from a fascinating collection of properties, which is why I believe they will soon be a critical element in the achievement of diverse portfolio construction.
The main difference between a Protocol Token and a Traditional Asset Token is the correlation with traditional centralized assets. This correlation defines the strength of the relationship between two variables. The more they evolve together, the higher the correlation.
Given that TATs are created based on real-world centralized valuable assets, they are dependant on the value of those goods and greatly controlled by the market fluctuation around them.
A Protocol Token is a low-correlated token with any traditional financial system due to its independence from such systems. Therefore, its correlation coefficient is close to zero. PTs are constrained by the rules of their underlying protocol, which is supposedly incorruptible. As such, they are not so exposed to any hidden erosion in value (such as Quantitative Easing) or traditional risks that have emerged over the years in financial markets. Since all protocol tokens' total market cap is less than 1% of that of gold, there is an extreme potential in this asset class.
Although high correlation does not necessarily imply causality, in this case, a high correlation between TATs and traditional centralized systems is also implying it. This means that the evolution and link between these variables' signals and history are close to one, and prediction can be easily performed.
This being said, the next time you analyze an ICO or an investment, remember to look at how it will likely evolve in the long run and the market space it has.
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