Token Map Series
5 - Token Concepts, Contracts and Identity
- A token instance, whole or fraction, is a single party unit. Meaning, it usually has a single owner and is transacted against in a single atomic unit.
Translation: when you are paying $1 for a red balloon at the park, your transaction is completed when you are handed your new red balloon and walk away to enjoy it.
- The owner has complete control of it, unless there is an encumbrance present.
Translation: this means if you are the owner of a home that still has an outstanding loan backing it, its encumbered and you may not sell it to another party unless you pay off your loan.
- Tokens are meant to be contracted. A transfer on a token will not be aware of any conditions that need to be met before completing. A token receiving a transfer request is not concerned about the external conditions in which the transfer was generated. But the token can have a behavior like encumberable which allows a contract to encumber the token to prevent the transfer to another party until the loan or lean is removed. The token doesn’t need to be aware or concerned about how it was encumbered or how it is freed, that is the loan, or contract’s job. This allows tokens and contracts to interact with each other seamlessly.
Translation: The owner of a home, holds the property title and can transfer or sell their home to a buyer. In that process, the owner’s loan encumbering the title from one bank is paid off by the buyer, who, if financing the purchase can use a completely different bank. The buyers new loan can simply encumber the same title after the seller’s lean is removed.
- A token’s behaviors are essentially interfaces or extensions for how the token can be used. For example, if a token is financeable, it has the ability for the owner to accept a lean, representing the loan, which encumbers the token. In this case the loan represents a contract that is bound to the financeable behavior of the token. The loan itself is a multi-party contract with the token owner being the borrower and the financier the lender. The token and the loan operate independently, however only the loan can remove the lean once it is paid in full.
This brings us back to the important point that tokens are not multi-party contracts, or at least they shouldn’t be. Mixing the two together decreases re-use and interoperability. Tokens are meant to represent value that are included in multi-party agreements or contracts, just like a Property Title being encumbered by a loan contract which defines the conditions to remove the lean from the property resulting in the buyer owning the property outright.
A Token behavior can act and react to itself or require an external actor like a contract to invoke it, or internal and external behaviors. Technical people usually call this an interface, but you can think of an external behavior like an electrical outlet and the thing you are plugging into it the contract or even another token.
What About Initial Coin Offerings (ICO)
An ICO is a class of fungible token that is usually associated with a blockchain platform or product. It typically represents either:
- Equity in a business that is behind the creation of a new product or platform. This makes the equity token holders like shareholders.
- Fuel or utility required to consume the new service being offered.
For the past couple of years, ICOs have been subject to a huge amount of financial speculation. In many cases the companies creating them had sound motives for issuing them, however, a mania built up around them much like dot-com stocks in the late 90s and early 00s. Unfortunately this turned out to be a demonstration of history repeating itself.
Despite this, the concept of using an ICO, or perhaps a new name for them, to start or fuel an initiative is an innovative way to crowd source and address problems like financial inclusion, if implemented properly.
Anyway, we digress, we’re interested in how digital tokens can revolutionize business, not financial speculation.
Contracts
Contracts are covered much more extensively elsewhere, I wrote a good git about it earlier in the Bletchley series. The important concept about contracts is where tokens are single party instruments, contracts are multi-party instruments that can contain terms and conditions for the issuance of control over a token(s).
This, of course, is not exactly a clean distinction. Because a Token could still have a relationship with its issuer. For example, a token representing physical money is a contract between the holder of the token and its issuer, that they will honor the token as valid currency. However, thinking about this token, as only requiring a single party to spend the token, meaning the issuer doesn’t need to approve of the transfer and this token only has a single acting owner or party where a contract can have multiple actors or parties engaged simultaneously, is a good way to frame the difference between a token and a contract.
An example of a contract that is separate from the token, besides a loan, would be an insurance policy or warranty. Contracts can be complex, like a trade involving multiple tokens from different classes. For example a sales contract to transfer ownership of a piece of art using a certain number of Bitcoin where the Buyer transfers Bitcoin to the Seller and the Seller transfers ownership of the art to the Buyer. Sounds simple, but it can be complicated based on business requirements like using an escrow account that will release the Bitcoin when the actual piece of art is received by the buyer.
Separating out Tokens from Contracts is an important concept. Limiting tokens to the set of properties and behaviors needed for a digital representation of value makes them more contactable.
Identity
As tokens are owned and contracts have counter parties, establishing the identity of these participants and validating them is vital. Blockchain identities are usually represented by a public key or address that is backed by a private key. However, an account is different than an identity.
For example, you have an identity and can have multiple accounts on the same network and on other networks.
Public networks are often called trust-less where the account is all you need to transact, but once you step up to commercial business in a serious way you are going to come up against regulations like KYC where establishing identity behind the account is required.
There are solutions for managing corporate and institutional identities where the institution provides their employees an identity for logging in and using applications like email that they can assign blockchain accounts to.
When you are engaging a company for online services for personal use, you are likely using a personal email address to identify yourself. However, this really isn’t your personal identity, there is still a corporation like Microsoft or Google providing it and you might have one identity from each. This introduces a wide range of challenges but proposed solutions have tremendous upside that we will not go into here.
To learn more about identity issues and the efforts underway to help address them, self-sovereign identity can get you pointed in the right direction.
Here there be monsters
Well, that is it for now, you have reached the edge of the map. There is a wealth of information available out there, now that you have context. For example, checkout the [Token Map Series](https://www.youtube.com/playlist?list=PLndM9ZTRSX-Yb980yRZIoeqXy3qX9uijU) of videos, for those that would rather watch a video than read a long paper. (Perhaps we should have put this link at the top)
Token Map Episodes
But beware, the metallurgical assayers are watching you!
