Why Tokens
What are tokens? Tokens are incentives of the ecosystem. This can directly influence and steer the behaviour of participants through Incentives Design. Tokens can be considered as units of value that are currently built on top of the blockchain layer and they can hold different functions.
Traditionally, tokens have existed long before the emergence of blockchain networks. They can represent any form of economic value or access right. Tokens always need measures to ensure their validity, fungibility including security mechanisms. The validity and security of a cryptographic token are managed by smart contracts design which can embed a set of rules which is also referred to as a token contract.
The first tokens were called native tokens of public and permissionless blockchain networks, also referred to as protocol tokens, and were part of the incentive scheme of the blockchain infrastructure. With the rise and increase in Ethereum’s technology stack layer, standardised smart contracts like” ERC-20" have become compliant fungible tokens, where every token can be easily traded and swapped between each other. Furthermore, more complex token standards have emerged which led to the rise of “ERC-721” which stands for non-fungible tokens on the Ethereum network. These tokens are known as NFT’s in the case of art but other cases are also paving the way such as property, personalised access rights and voting rights.
Properties of tokens.
Are Tokens Money?
Basically, tokens are neither currency nor security. Crypto-tokens incorporate variations of both but most importantly incorporate a behavioural nature where non-rational behavioural economics can take place. This leads to one of the main principles of token design, which is to draw value from the ecosystem and accrue economic value. The token ecosystem itself can be the main incentive for network participants to contribute and achieve success. Basically, the more participants within the network that ensure liquidity, the greatest odds of success a token can have. Now, recent developments in tokenomics allow for economic value to be accrued based on the applications that the tokens can deliver inside and outside the ecosystem. Whilst, having a list of A-star influencers can steer the price of tokens, more projects are trying to find use-cases for their models and get mainstream adoption.
Why creating and promoting tokens?
Tokens could represent a specific financial strategy, an incentive mechanism or an asset ownership vehicle. When creating and distributing a token mechanism, the market participants are directly involved in the governance and decision making of how tokens can be shaped. Whilst many questions remain about stability, price-evaluation mechanisms and purpose of the tokens, what is clear is that this is a new class of digital assets, that goes beyond being a cryptocurrency and has the potential to model a new entire economic model. These new asset classes can enable redistribution of wealth creation, giving everyone a chance to contribute and increase the value of their tokens by participating in the market. Tokenomics, an increasing field and a subject of one of our future series, is enabling a research sub-domain within the Blockchain layer and companies such as https://matic.network will only enable the rise in mainstream adoption and increase the token landscape.
One interesting concept is “equity tokens” that could allow a general consensus amongst regulators which seems to be of growing concern recently. Defining an equity token could avoid granting voting rights to investors and could arise interest in corporate investors. These instruments could be traded all year-long without any limitations on geographical or time-zone bounds. Furthermore, a different relationship could be allowed between the companies founders and its investors. This can enable the decision-making and the voting rights to remain well within the newly founded company. Equity tokens are a new and evolving market mechanism product and questions remain about its market value when compared to a traditional share. These could also replace the pseudonymity associated with every token holder. New regulations and KYC practices are needed if this new crypto-asset is due to grow and develop to new massive market adoption.
The new tokenomics models that are just emerging are in their infancy and entrepreneurs and corporations alike will experiment and tackle these challenges hopefully to lead to new crypto-economics experiments that will see mass adoption.
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