Let’s Talk Tokens
By Alex Tapscott
When it comes to tokens, myths and misinformation abound. Often, all tokens are classified as “cryptocurrencies.” This is unfortunate, as the term cryptocurrency is a misnomer. Most tokens are not trying to be currencies in the classical sense of a medium of exchange, store of value and unit of account.
Just as websites are containers for information, tokens can be thought of as containers for value. Increasingly many businesses are harnessing digital assets, also known as tokens, to open new markets, create new products and services and reach customers. And indeed, there is a near infinite number of different tokens representing ownership in everything from money to stocks, art, collectibles, data, natural assets, and much more. Let’s revisit the token taxonomy. Here are the ways tokens are being deployed today:
1. Cryptocurrencies like Bitcoin attempt to build Internet-native money that can act as a store of value, unit of account and peer to peer medium of exchange. Bitcoin is the dominant cryptocurrency with a market value of approximately $400 billion US dollars. Bitcoin also represents roughly 40 percent of the total market value of all tokens.
2. Protocol tokens like ETH, which powers the Ethereum blockchain, are foundational to the development of Web3 applications. Application developers need ETH to run applications on the network. So, the more applications that people build on Ethereum, the more value accrues to its native token because of the greater demand for ETH. A power utility makes more money when it has more customers.
3. Governance and utility tokens give holders an economic stake and a say in how a protocol, service, or product is operated. Adopters of the product or service can earn or buy these tokens in the open market. For example, holders of UNI have a vote on decisions affecting the Uniswap decentralized exchange, which runs on Ethereum.
4. Oracle tokens: Blockchains are immutable records of transactions in a network. The information recorded to blockchains is trustworthy, searchable, and auditable. This is one of their great benefits. However, they are self-contained systems, meaning they do not have ‘access’ to data that happens in the real world. Oracle systems create incentives to bring accurate ‘off-chain’ data onto blockchains.
5. Interoperability tokens: We need easy ways to connect different blockchains, kind of like bridges and tunnels for the internet of value. Interoperability protocols like Cosmos have tokens that help regulate the flow of value across chains. Perhaps the easiest way to think of them is as the tolls for canals and other arteries of blockchain commerce. The more trade there is, the more these platforms prosper.
6. Securities tokens are tokens that represent a claim on a security like a stock or bond. A securities token could be a share in a company, a bond, a derivative contract, a mutual fund unit and so on. While the potential is enormous, securities tokens remain a niche, largely because laws don’t widely recognize them yet.
7. Corporate coins are issued by centralized businesses, mostly cryptoasset exchanges. They are like loyalty points but turbocharged. They are used by some companies for special rebates, rewards, promotional offers and so forth on centralized exchanges. But they do not always come with economic and governance rights, like equity or, for that matter, governance tokens. One application for corporate coins is loyalty points that are self-custodial and fungible.
8. Natural asset tokens are backed by assets like carbon, water, or air. Natural asset tokens are a form of collateralized asset such as the carbon credit. The opportunity here is significant: Carbon offsets can help fight climate change. A decentralized global registry to buy, sell, and retire credits could expand the industry materially.
9. Stablecoins are digital assets pegged to another asset with stable value such as the US dollar. Stablecoins are the primary medium of exchange in Web3 and have grown twenty times in a few years to over $100 billion in supply.
10. Non-fungible tokens (NFTs) NFTs are unique digital goods that are provably unique, provably distinct, and therefore not fungible and not interchangeable. While commonly associated with art and other rare collectibles, NFTs are also useful for expressing bespoke contracts and agreements.
11. Central bank digital currencies (CBDCs) are digital assets issued by governments and central banks. Advocates argue that it could accommodate unbanked people, reduce costs, and expose financial risks earlier. But detractors warn it could be used as a surveillance tool and thus a way to control citizens
Taxonomies help us organize and classify information about the world around us. They are incredibly useful, especially when industries are nascent, and confusion abounds. The one omission from this list would be the so-called “meme coins” which periodically surge from the primordial stew of internet subculture to reach dizzying values. Dogecoin is the most well known, but Pepe, an Ethereum ERC 20 token, just hit over $2 billion in value. There will be others. In time, I also fully expect this taxonomy to become less useful. For the same reason a “taxonomy of websites” today would be silly (after all, websites can be programmed to do more than could fit in a single taxonomy), token taxonomies will feel woefully incomplete or oversimplified.
May 25, 2023
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