Tokenisation part 1 – An overview

This Picasso painting could be tokenised in two different ways (1) the painting itself could be represented by a non-fungible token, because it’s not mutually exchangeable with other paintings and (2) ownership shares could be represented by another fungible token, because any share of the painting is equal to any other share.

One of the things that needs to happen for blockchain and crypto assets to truly take off is – tokenisation of things. In this blog post I will explain what this is, and some important concepts surrounding this.

What is a token?

In the context of the digital age and blockchain technology, a token is a digital representation of something. Generally speaking, there are two kinds of tokens (1) fungible tokens and (2) non-fungible tokens.

I’ve written about fungibility in the past, but for new readers here’s a quote from that blog post:

Goods or items in a collection are “fungible”, if all of the items have the same value and are mutually interchangeable. For example, one kilo of gold has the same value as another kilo of gold. Another example is stocks within a company that are interchangeable with each other without any kind of loss in value or meaning.

And non-fungible tokens would be the opposite, namely those tokens represent things that don’t have the same value or are not mutually exchangeable.

On blockchains, tokens are usually built and represented with smart contracts. On the Ethereum blockchain fungible tokens are defined by the ERC20 standard, and the newer ERC777 standard. Non-fungible tokens are defined by the ERC721 standard. As a bonus to this mini-series I might write about how to create your own Ethereum token!

Examples of fungible tokens could be:

  • Cash money
  • Shares in a company (like Apple Inc.)
  • Shares in some thing (like a solar power plant)
  • General membership in an organisation
  • Discount vouchers to a certain shop

Examples of non-fungible tokens could be:

  • Concert tickets; seating positions aren’t equally great, or mutually exchangeable
  • Some collectible thing, like art or a crypto cat
  • Advertisement spots on websites; different ad sizes and locations with different publishers

Token models

All of the examples above can be further broken down into tokens with different kinds of models, which I’m going to write about in part 2 of this mini-series. I’ll cover what the differences are between currency tokens, utility tokens, securities, governance tokens, discount tokens etc.

Price evaluation

In part 3 I will cover different models for evaluating the price of different kinds of tokens. We will cover models for fair evaluation, speculative trading etc.

Distribution of tokens

And in part 4 of this mini-series I’m going to write about different ways that tokens can be distributed, or sold. I’ll cover different kinds of responsible crowdsales, what the differences are between hard-cap sales, soft-cap sales, air drops etc.

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