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What Is A Token In Cryptocurrency?

Crypto tokens are not just speculative in nature - many have real-world value and utility

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When we speak of tokens in cryptocurrency, we’re talking about assets. But what is a token exactly? It’s usually some form of money, but often it can represent something else entirely — membership in a program, for instance, or proof of ownership. In crypto, tokens have many meanings…

Bitcoin is the primary token in cryptocurrency: the oldest, most valuable, and perhaps the most used. It serves many purposes, but they are almost exclusively financial. While Bitcoin has some token implementations in the form of Counterparty, there are many arguments that Bitcoin is not well-suited to playing host to tokenized assets. Therefore a (growing) number of specialized blockchains have been developed with native intent to support tokens, including:

In some cases tokens are used specifically as a funding mechanism for companies, in which case they act like a stock. Other tokens have purposes which cannot be completed without them — consider a casino’s poker chips as analogue tokens.

Most tokens have a fixed or limited supply decided by the issuer. Their value is often related to said supply, but it’s not always important. In the case of the base Ether token (ETH), for instance, there is fundamentally an intent to continue minting new tokens forever.

The Token Revolution

Ether perfectly illustrates the point: it is required to launch and use various other tokens on the Ethereum blockchain. It is no coincidence that ETH is fairly often the most valuable token on its blockchain. (At the time of writing, a token called MKR is worth a bit more than ETH – but there are 98M ETH and only 1M Maker tokens out there, so the market capitalization of ETH is almost a hundred times higher than MKR.)

The value of a token is ultimately determined by its purpose and desirability. Since anyone can issue a token on a public blockchain, only well-designed, well-intentioned, and useful tokens retain long-term value. (At least, theoretically.)

Tokens have been used for an extraordinary range of purposes already. While there have been criticisms that hyper tokenization of services will ultimately lead to flops and failures, and it’s true that plenty of services simply do not need tokenization, at least as many use cases do seem to make sense – and it seems blockchain companies and everyday people will mutually benefit from the continuing rise of a tokenized economy.

Many Tokens Across Many Chains

Today there are two (decreasingly important) factors which limit the capability of a given blockchain. One is available (both consumer and commercial-grade) bandwidth and the other is storage. Every letter or other character stored in a computer system requires space.

By nature, most blockchains seek to store these data in a decentralized manner, while some argue that to accommodate future growth, data centers with high connectivity and limitless storage will be necessary, and users should not be counted on to participate in this aspect of the network.

In any case, these limitations, which, according to Moore’s Law, are reduced as time goes on, have created the need for more and more blockchains. Depending on the purposes of a token, its designers select the blockchain that makes the most sense. For economic and stability reasons, an overwhelming number of token creators today choose Ethereum, but there is no reason to suspect this will always be the case.

Viable upstarts such as NEO offer interesting new possibilities for blockchain-based technologies. Just as there are still dozens of search engines but Google is the most popular, the number of blockchains that can be used by tokens will increase rather than decrease with time.

The Tokenization of Everything

Today it’s probably hard to imagine a world where, for instance, you can seamlessly sell your subscription to XYZ service (its token representing the subscription itself) or where people actively buy and sell electricity (or any resource) on peer-to-peer exchanges, but this is because all of the technologies surrounding blockchain tokens are quite new. The following hurdles have yet to be fully overcome:

  • Government regulation.
    • Many tokens are potentially “securities” and for this reason the law is in its infancy as regards adapting to token technology.
  • Technical debt of average users.
    • While plenty of value can be derived from technically hard concepts in the short run, none of the companies using tokens to fund themselves or as a basis for their platforms will succeed if everyday users are not able to grasp the concepts underpinning them.
  • Accessibility.
    • While one of the great benefits of decentralized economies is that anyone in the world can access them, it’s also true that people without some method of getting online and using electronic banking will continue to be left out of the tokenized economy. From a mission perspective, this creates an upper limit on the actual impact tokens can have on the world.

These issues mitigate every year, with governments legalizing cryptocurrencies; the cost of technology coming down; and increased global connectivity, but until they are a thing of the past, blockchain enthusiasts are likely to continue waiting impatiently for a blockchain-friendly world.

Crypto Token Benefits

  • Usability

While different tokens have different values, and utility tokens may ultimately present the best possibility of longevity, one great benefit of crypto tokens is that they are, by nature, exchangeable for other forms of value. Speculation on the value of tokens is (supposed to be) secondary to their actual use.

  • Transparency

Unlike legacy tokenization systems such as Chuck E. Cheese tokens, the transfer and ownership of blockchain tokens are both verifiable. It’s essentially impossible to counterfeit tokens, which lends them a real value – as opposed to value systems created by non-transparent groups.

  • Cost And Speed Of Exchange

Many tokens are designed specifically to be used in facilitating vast numbers of transactions. For example, the Internet of Things requires countless millions of machines to exchange information (and nano payments, in some cases) in a manner that would be totally impossible for existing payment infrastructures such as Visa, or PayPal, to handle. These tokens make it possible for a new economy (NEO calls it the ‘Smart Economy’) to develop – one in which, for example, clean air emissions caps might be exchanged by power companies so that the overall effect is a mutually-profitable way to reduce greenhouse gases.

Cryptocurrency Token Drawbacks

  • Attractive to Bad Actors

There have been plenty of legitimate criticisms that the Initial Coin Offering model has made it too easy to get money for projects that may or may not ever produce a product. A large portion of them are based on endless promises of things they will do — and of course, in the marketing hype, we never hear about the roadblocks that will inevitably arise. At the same time, scammers have found the model quite friendly to getting “free money,” and the irreversible nature of cryptocurrency will continue to make profitable for bad actors, until something is devised to change the balance in favor of the lawful actor.

  • Operate Largely Outside Government Controls

One of the greatest benefits of cryptocurrency can also be its biggest drawback. The Internet provides more data than ever, but it’s still relatively difficult to quickly verify the claims of a company’s location or legal status. Lacking realistic forms of regulation, a random kid in a backwater Russian town can, in theory, launch an ICO and bring in millions of dollars worth of coins, if he is dedicated to the cause.

  • Many Are Structured Unfairly

Last year’s rash of ICOs had a high number which functioned as giveaways to the “team.” Companies operating ICOs would help themselves to 50% or more of the coins — meanwhile, the coins gave their holders no actual control or ownership of the firm in question. Much of this was left to the fine print.

 

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