A token is a generic quantified unit of value that is registered on a blockchain network.
Today tokens are understood to come in two kinds: utility tokens, and securities tokens.
Security tokens represent fixed assets of some kind, it may be a piece of property such as a house or a share in a company.
A utility token is a more liquid medium of exchange that gives one access to the value created by a blockchain network. Utility tokens really represent access to a service delivered by a blockchain based ecosystem.
To understand token economies it is best to think in terms of services and not products. Utility tokens represent the service delivered by a network. The utility tokens are quantified units of services that can be accessed within a given network.
Tokens are generic units of value. This means that they can represent any kind of value. Wherever there is a network delivering a service, a token can be created to define that value.
We can create a token for any different type of network and service.
For example, a community watch scheme where people look out for each other’s houses to make sure there are no trespassers or burglars. This is a community that is delivering a valued service of securing peoples houses.
We can then define an economy around that community, by creating a token that quantifies the service delivered and a blockchain system that keeps track of who is delivering the service and who is using it.
This utility token is then used as a medium for the exchange of that service. Those who consume the service have to give tokens to those the provide it. In this example, we can see how token economics works to formalize what was previously informal and merges economics and social communities in new ways.
The service can be of many kinds. Health care services, for which we might have a health coin; it could be cleaning services, a clean coin; a transport service.
For example, the DAV Token is a form of utility token. The DAV network is a blockchain platform currently under development that connects transport and logistics service providers with those who need those services – in particular, it focuses on connecting autonomous vehicles.
Members of the ecosystem can earn DAV Tokens by providing transportation services, by say, letting your self-driving car give rides to passengers when you’re not using it, or having your drone help with deliveries. While users of the service pay tokens to be transported anywhere or to send and receive packages through the network.
A utility token, such as that of the DAV Token, should then reflect the quality and quantity of the service that the network can deliver. The better the quality the more people will want it, and the greater the quantity of service delivered, the more tokens will be needed.
Some people classify digital currencies as a third type of token, but they can just as easily be understood as a utility token.
For example, we might think of Bitcoin. Ultimately, Bitcoin’s value comes from its capacity to be exchanged for some service or exchange for some other currency that can be used within a national economy, such as the Euro.
Currencies like the Dollar or RMB have value because we believe they have value. But ultimately they rest upon the fact that they are supported by the massive real economies of the US or China. Really they are utility tokens that give you access to the services delivered by those economies.
If the Japanese real economy disappeared tomorrow the currency would crash because people would stop being able to buy things with it.
Currencies are just mediums of exchange and agreements about what we value but they are supported by real economies and governments that make sure those currencies can be used to access the goods and services within their economy.
Bitcoin may not be directly linked to any one national economy, but at the end of the day, it is linked to the global economy in one’s capacity to exchange it for other fiat currencies that are linked to national economies.
Thus we can see how currencies are a form of utility token that provides access to the services created by a given economy. Whereas fiat currencies provide access to a national economy, tokens provide access to a blockchain based network economy.
Because tokens have a price, they can be issued and sold at the inception of a new network to fund its development. Similar to the way startups have used crowdfunding platforms like Kickstarter to fund product development. The money is typically received in digital currency form and goes to the founding organization that is developing the network and issuing the tokens.
In the same way that a company increasing sales is an alternative to raising money, token launches can be an alternative to traditional equity-based financing and as we will discuss in a future module, can be an effective way to fund previously unfundable shared infrastructure, like open source projects.
Utility tokens, also called app coins or user tokens, represent future access to an organization’s product or service. The defining characteristic of utility tokens is that they are not designed as investments. If properly structured, this feature exempts utility tokens from legal regulation covering traditional forms of securities.
By creating utility tokens, a startup can sell “digital coupons” for the service it is developing, much as retailers accept pre-orders for a good that may only be available weeks later.
Filecoin, for instance, raised over two hundred million by selling tokens that will provide users with access to its decentralized cloud storage platform. Thus we can see that the traditional divides that defined the industrial age financial system become blurred and redefined within the new model of token economics.
The question is though, why do we need hundreds or thousands of different types of tokens? Why can’t we just pay for everything in Dollars like we used to or even in bitcoins, wouldn’t that be simpler?
Answering that question goes to the heart of the distinction between token economics and traditional industrial age economic systems and we will talk about this in the coming module.