Tokens today
On April 17, 2019 Microsoft, and Ethereum group launched a token-building kit for enterprises. Prior to this, the Enterprise Ethereum Alliance launched a blockchain-neutral token taxonomy initiative to accelerate a token-powered blockchain future. To add to this, JP Morgan created JPM Coin, a digital coin designed to make instantaneous payments using blockchain technology. These are just a few recent examples of blockchain-tokenization in our economy. Tokens are what are being used to transact value on a blockchain platform or ecosystem and have opened up an entire world of opportunity. When you look at “in-game” currency or tokens that gamers can accumulate (same for any industry where you accumulate points or something of value), you can only redeem or exchange that “in-game” currency for “in-game” assets. Our future in a tokenized economy presents an opportunity to take “in-game” assets and exchange them for real money or more “in-game” currency.
Tokens have become so important in such a short amount time. They enable us to do things that we could not do in a private company model. There are huge incentives for loyalty reward programs and early adoption. Although the token economy is a new concept, we will soon be seeing what new marketplaces will look like and what the benefits will be.
What are tokens?
Without adding cryptocurrency or blockchain, a token is a thing serving as a visible or tangible representation of a fact, quality, feeling, etc. For example, “I wanted to offer you a small token of my appreciation”. A token is also a voucher that can be exchanged for goods or services, typically one given as a gift or offered as a part of a promotional offer. For example, “You can redeem this token for a free television”. Most of us understand these definitions and have used them throughout our life.
Insert cryptocurrency and blockchain, a token is a unit value that exists on a blockchain. Tokens won’t have their own blockchain but will depend or exist on an existing blockchain of a cryptocurrency. An example of this is Bitcoin (cryptocurrency) on the Ethereum blockchain. A token has a unit value and that value is tradeable. The value can exist in the from of coins, points, certificates, etc. Not that different from your modern day definition mentioned above. Tokens are often used to raise funds in an ICO (Initial Coin Offering) or crowdsale which is comparable to IPO (Initial Public Offering) of companies going public on the stock exchange. In the case of an ICO, companies would be going public on the blockchain making their coin tradeable on the cryptocurrency exchange.
The main difference between cryptocurrency and tokens is that cryptocurrencies will have their own separate blockchain, while tokens are built on a blockchain, which facilitates the creation of decentralized applications. Decentralized application are what you see so many folks building on different blockchains. These applications often solve a problem related to many organization’s front, middle, and back office woes around transparency, viability, tracking, and reconciliation, to name a few. These applications are blockchain based and create a means for organizations to interact with third parties or other internal parties that may be disparate, making certain business processes and transactions difficult.
To add a little more, there are two different tokens applicable to cryptocurrency. A security token represents equity or debt of a start up and utility tokens represent the right to use a product or service, or cater to a specific function in the ecosystem of the start up. The purchase of security tokens is seen as an investment because they represent ownership, but they are subject to federal securities regulations. Utility tokens are not considered as investments, as they simply provide access to a product or service.
Tokens are a revolution in representing value. The creation and ability to represent value becomes based on the ease of establishing authenticity, establishing ownership, and direct exchange, which is based on trust derived from a shared truth. In more simple terms; token A represents X, and I can trust this because blockchain technology enables me to do so.
Figure 1: Represents a token economy at a high level
Token equality
Not all tokens are created equally, and have specific, and different behaviors associated with them.
Value. Not all tokens have the same value. They can be split into two categories; non-fungible, and fungible.
Fungible tokens are simple. When something is fungible, it means it can be easily be replaced by something identical. It is easily interchangeable. A dollar bill is the same as another dollar bill and is interchangeable. Another example, could be an apple, or a bank note. If you were to lend money to someone it would not matter if they didn’t return the exact money you lent them.
Non-fungible tokens are special. They represent something unique and cannot be interchangeable. This would be the opposite of bitcoin and other cryptocurrencies as well as utility tokens mentioned above. A physical example of a non-fungible token would be a plane ticket. Although, your ticket may look identical to the person next to you, it is not. There are different passenger names, destinations, departure times, and seat numbers. Your ticket cannot be exchanged with someone else’s for the same value. Non-fungible tokens offer unique characteristics which make them different and digitally scarce. Many non-fungible tokens are ERC-721 compliant, and it is important to note that they cannot be divided or bought and sold in the way that fungible tokens can.
Non-fungible tokens allow you to detail the attributes that make them unique and special. You are able to include and associate rich data and meta data about an asset; land, car, etc. and also include information about ownership. These details add value because the provenance can be demonstrated via the blockchain.
Many blockchain based solutions being developed incorporate the use of non-fungible tokens. Essentially, you are assigning value to an existing physical asset and anchoring that asset to the blockchain for the remainder of it’s lifecycle. For example, creating a secure, immutable way of storing federal documents, academic credentials, warranties, identities, titles, artwork, and property and ownership are all real-life blockchain use cases that use a non-fungible token. These non-fungible tokens are created through decentralized applications. If you wanted to create a non-fungible token for property deeds and land titles, you would first create a blockchain-based application and assign physical assets a unique identifier, therefore tokenizing it via a non-fungible token.
The last token type is a hybrid token. An example of this would be a group of tokens, owned by other tokens and represented as a single token. A real life example we can check out is theater tickets. The base of the theater ticket is non-fungible; play name, date, but there are tranches of non-fungible tokens for theater sections.
Token behaviors
Supply. Not all tokens have the same supply. Tokens have properties and behaviors associated with them.
A token with a defined set of properties and behaviors can be reusable across multiple domains and be placed in a category or class.
Tokens have both a fixed and variable supply. For example, a token representing money, with the ability to create and remove supply, similar to a central bank. A token can be created for each barrel of oil of a particular grade. These tokens are interchangeable with each other, and a token of oil can be removed when it is consumed. A token can be created for airplane parts as they come off the assembly line, but you wouldn’t remove them when the plane is assembled or manufactured, only when the plane retires or is demolished.
A set of behaviors define tokens. Tokens differentiate themselves based on their behaviors, which then creates new properties that are bound to them. All tokens will have common set of base token properties and collection of non-behavioral related properties.
Transferable — ability to transfer ownership of the token. Basic fungible behavior when using cash money, but can also apply to non-fungible tokens.
Non-transferable — restriction of preventing a change of ownership from the initial issued owned. A vote token for an election or an airline ticket are good examples.
Sub-dividable or whole — decimal places a token can be subdivided into. Cryptocurrency is a good example of this. You can purchase 0.25 bitcoin (fungible), but you cannot purchase 0.25 of a plane ticket (non-fungible).
Singleton — there can only be a quantity of one, where the token represents the only instrument. An example of this would be a piece of fine art.
Mint-able — ability to issue new tokens of the class. For example, creating a new property deed or adding money to an existing supply.
Role support — ability to have roles defined within the class to allow or prevent certain actions.
Burnable — ability to remove tokens from the supply. An example could be a token that represents a barrel of oil that gets burned when it is refined.
Artifacts
Artifacts are made up of token behaviors, property, and control. Tokens are comprised of properties and behaviors that can be interacted with using standard control messages. The token taxonomy simply defines these behaviors and the properties that make up a token. Most behaviors are already known, they are just defined this way.
Property is a data element that is bound to the token by one of its behaviors. A sub-dividable token will have a decimals property. Control, is a message that is used to invoke behavior (verb) or represent a property/state (noun).
Once a behavior, properties, and controls are defined, they are bundled up and we now have an artifact.
Behavior artifacts will have a common name, a symbol, and be internal or external, where external is linked with a contact. Behavior groups are a collection of artifacts to form higher level artifacts. These also have a common name and symbol with an additional symbol with links to the behaviors it includes.
Once a token is classified via the artifacts it is considered complete and ready to implement.
Classification and hierarchy
Tokens begin at a common root, or base. The base has two initial branches; fungible and non-fungible. New branches can be created from either parent branch (fungible or non-fungible) but that does not represent a complete token. For example, a non-transferable could be a branch on non-fungible, but would not be a branch on fungible.
A behavior such as transferable, can apply to both branches (fungible and non-fungible) and would be represented as its on branch on both parent branches.
The tokenized economy
There is a lot to gain in the advancement of a tokenized economy. It will create a new way for us to generate wealth. It has the potential to create secure, decentralized, and inter-operable systems to meet the needs of both businesses and consumers. A lot of work remains to transform our economy, but these technologies and concepts promise to disrupt business models and transform industries along the way.
