What are tokens and why are they better?
Blockchain technology is without a doubt one of the most revolutionary innovations in the post information era. Distributed system technologies may restructure and reform economic, political, social and even geographical structures.
Decentralised structures, digital scarce assets, and open participation together with a so-called trustless system are possible thanks to blockchain technology. The backend infrastructure is still in its early days, but we have already seen substantial progress regarding scalability, privacy, and efficiency within the last couple of years. The next ten years will undoubtedly be the phase where we see exponential advancements in blockchain infrastructure, networks, protocols and applications of the new web.
But what about tokens?
First, when you think of tokens, you might picture a plastic round chip used in casinos or old school game arcade halls. But in the cryptographic world, we talk about native or application tokens of public and permissionless blockchains that play a part of incentive schemes encouraging a group of people who don’t know each other to organize themselves around a specific set of rules in the blockchain.
Blockchain-based tokens enable distributed internet communities to emerge and act together in a meaningful fashion.
*Native blockchain tokens can be called as coins. For simplification, in this article, the term token is used to describe both protocol and application layer digital assets.
Traditional companies vs. DAO & tokens
Traditional companies are structured with many layers of management resulting in bureaucratic coordination. Decentralised autonomous organizations (DAOs) disrupt the traditional top-down governance model by creating a set of rules, not by a legal entity and paper contracts, but by the use of tokens within a transparent set of code written in software.
The critical factors separating these two different organizational structures lies in legal entities, consensus mechanisms, and governance models. Top down management has one legal entity while decentralised autonomous organizations have no centralised legal entity, nor do they have employment contracts. Instead, DAO has a machine consensus mechanism around token governance rule sets and smart contracts. Top down management model consists of several layers of management for coordination and enforcement processes, which ultimately results in information and decision bottlenecks and even corruption.
Token structures
Tokens have moved up on the technology stack and can now be issued on the application layer or as dApp tokens on top of the protocol layer token such as Ethereum. To simplify it; protocol tokens main purpose is usually 1) block validation incentives (´miner rewards´) and 2) transaction spam preventions. The application layer consists of decentralised applications, application hosting and browser forming a cohesive customizable application architecture replacing the centralised application systems. In other words, application tokens are the tools for navigating the individual operating system.
Types of tokens
There are several ways to differentiate and classify tokens. Crypto economics is still in its infancy, and many possible alternatives will present themselves in the future. Here are three different categorizations:
1.
Usage tokens
A token that is required to use a service. Ownership doesn’t entitle you any specific rights in the network but gives access to service. Bitcoin and Ether are best examples of usage tokens.
Work tokens
Gives rights to contribute to a network or DAO and earn in exchange of the work. The work can be securing the network (Ethereum PoS), collateralizing the debt system (MakerDAO) or serving as an oracle (Augur).
2.
Intrinsic or native tokens
Serve as the ultimate rule sets of the network by providing incentive schemes around block validation and preventing transaction spams.
Application tokens
Issued on top of native tokens via smart contracts that pursue a specific or complex operating system within the network.
3.
Utility tokens
Access to products or services the project will launch in the future. Usually used as a discount or premium access coupon.
Cryptocurrencies/payment tokens
Broadly speaking, cryptocurrencies purpose is to be items of inherent value (similar to gold, cash) that are designed to enable purchases or other transactions.
Security tokens
Represent assets of earning streams of a company that could be translated to dividend payouts or interest payments. Security tokens in their economic function are analogous to equities, bonds or derivatives.
So why are tokens better?
Tokens are not suitable for everything. There probably isn’t much sense to tokenise your toothbrush, but sometimes using token issuing models and structuring in network projects and businesses can result in significant benefits. Without going into technicalities, here are a couple of sample comparisons between traditional structuring and token structuring;
There might be a possibility that tokens play a big part of the decentralised economy forming new relationships with stakeholders and completely renovating the current financial and social structures of different entities.
In conclusion, at an individual level, tokens enable of being part of a project and not the product of the project. For example, Facebook’s product is the user; Facebook 2.0 is owned by the users. This in itself is a transformational thought and forces organisations to radically innovate and make compromises and bold moves when aiming to build the next phase of robust networks. At an organizational and even at the global level, tokenisation of some sort might drastically change the way how we look at businesses and industries.
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