Types of Tokens
The dramatic rise and fall in the price of bitcoin and other cryptocurrencies has generated interest in digital currencies and all things related to them. That includes blockchain technology and its many capabilities as well as other aspects of the digital economy like Initial Coin Offerings. With the digital economy on the rise and rapidly gaining ground, it is important to keep track and stay up to date. In this post I want to discuss the concept of tokens which has become so popular it is generating its own discipline: “tokenomics” – described as the study of tokenized ecosystems and the various economic models tokenized ecosystems can administer.
What is a token?
Quite simply, a token is a unit of value issued by a private entity, a concept that has become more common since blockchain turned traditional economics on its head. Previously, only sovereign governments could issue currencies and set their terms and governance, but blockchain now enables all kinds of private entities to issue their own currencies and set their own terms and rules around the operations of those currencies. Similarly, they can issue these units of value known as tokens, which are quite different from cryptocurrencies even though they share some similarities. Like cryptocurrencies, tokens have value attached to them and they are blockchain‑based (virtually all tokens rely on Ethereum’s blockchain protocol). But that is where the similarities end.
Unlike currencies, tokens can be used for a much broader range of applications. They can represent any assets that are fungible and tradeable, and can be used to grant a right, to pay for services or commodities, they can be used as an incentive, to transfer data, as loyalty points and even to pay for other cryptocurrencies. In fact, a token can be used in any way the entity developing it decides.
Depending on their function, tokens can be classified as utility tokens or security tokens, of which equity tokens are a subset.
Securities token are tradable assets. These tokens constitute an investment contract, and the main reason people buy them is the anticipation of future profits in form of dividends, revenue share or price appreciation. Investors can invest in securities tokens through ICOs and get tokens which range from coins that are redeemable for precious metals to tokens backed by real estate.
An equity token is a token or digital currency that represents equity in a company, making them a type of securities token. Unlike ICOs which do not represent equity in a company, but rather give access to a service or product, equity tokens are a better fund-raising tool for companies. This is because funds raised directly from investors through ICOs are not appropriate tools for company finance, as the money raised is project-specific. Equity tokens however, raise funds for the company as a whole and can be applied as needed.
Equity tokens are advantageous to start ups as they help reduce the barriers to entry into the financial markets. The lack of current regulation, however, means that very few startups have attempted to conduct equity token sales. Belin‑based Neufund is one of the first companies to go that route.
Unlike equity tokens, utility tokens – also called user tokens or app coins – are not designed as investments. They only provide access to a company’s product or its service. They operate like video game pre‑orders where customer pays in advance for games that are yet to be released.
Utility tokens are usually distributed through ICOs at project launch and the user acquires the right to use the product or service developed by the startup and/or to participate in decision‑making processes through a vote. Filecoin utility tokens, which will provide users with access to its decentralized cloud storage platform, is a good example of this.
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