The Token Economy
After the big ICO wave last year, Initial Coin Offerings as a method of raising capital through start-ups have now declined heavily again. While most larger companies are now experimenting with blockchain initiatives, the tokenization of benefits, rights or assets is a frequently mentioned use case of blockchain technology in addition to creating trust through decentralized data storage. But what exactly does this mean?
An article by Severin Kranz and Raphael Iten.
German version here
A basic distinction is made between coins and tokens. Coins (e.g. Bitcoin or Ether) represent native units of a blockchain and serve as a means of payment for transaction costs as well as an incentive for the network nodes to maintain the system. With blockchain platforms such as Bitcoin or Ethereum, the coin usually represents payment, usage and investment functionalities in equal measure. By issuing tokens on these platforms, however, the functionalities can be offered separately. The different types of digital assets are shown below.
Tokens are typically scarce digital units that represent assets or assets. Traditionally, tokens are generated via a smart contract. Such a rule-based contract remunerates the payment of mostly Bitcoin or Ethereum to a certain wallet address with the newly generated token e.g. from a startup. This is also called Initial Coin Offering or short — ICO. With the current emergence of tokenised assets, the term Security Token Offering (STO) is increasingly being used. In more general terms, the term Token Generating Events (TGE) is also used. Generally, a distinction is made between three types of tokens:
- Payment tokens are generally used as payment or value storage devices. Payment tokens can be used, for example, to pay fees on a block chain and for real goods, or as incentives for decentralized applications.
- A utility token is a digital means of payment that is linked to the use of an application or service. An example is Filecoin, in which the token serves as a means of payment for persons who make storage space available to the network.
- A security token assumes the role of share certificates or securities in digital form. Voting rights, dividends and the like are also possible. The concrete use cases depend strongly on the local legislation.
But why are tokens generated after all?
Although it has turned out in recent years that many tokens were used for fraudulent purposes or as speculative objects, the technology for the first time offers the possibility of storing digital assets decentrally and creating global incentive structures in distributed networks. The design of multi-token economies connects companies, industries, regulators and users and enables unique business models.
In addition to the well-known challenges of scalability and high energy costs, the token economy also faces regulatory hurdles. Furthermore, the greatest challenge to date has been to link real assets with the digital world. Today, trust is usually not created by decentralization and blockchain technology, but by intermediaries as usual.
A concrete example of a token economy in Switzerland is Swisscom’s ecosystem in cooperation with Deutschen Börse. Through the daura start-up, shares in companies are digitised and offered in the form of security tokens. Sygnum also ensures the FINMA-compliant linking of the tokens with the real assets and Custodigit provides a secure storage solution for the digital assets.
mm1, the consultancy for connected business supports companies from the idea generation to the choice of technology and partners to the realisation of your blockchain initiatives.
This article is part of an article series on blockchain technology. Read more articles from our blockchain team:
- Blockchain in 100 words
- 6 Myths about blockchain
- Different types of blockchains
- The token economy (this article)
- Application areas of blockchain technology
- mm1 blockchain use case assessment
- Blockchain in the mobility sector
- mm1 roadmap for blockchain initiatives
Severin Kranz has worked for several years as a consultant in the Fintech sector and in asset management. Since 2015 he has also been intensively involved with crypto currencies and distributed ledger technologies. Through his Master in Business Innovation at the University of St. Gallen, he has specialized in business model innovations as well as human-centered innovations through design thinking.
Raphael Iten is an experienced entrepreneur in sustainability management. Through his experience as a consultant in the insurance sector and platform construction for telcos, he considers and combines different approaches to solutions. In his academic career at the University of St. Gallen, he examines success factors of active Blockchain projects in the insurance industry.
