Tokenisation part 2 - Different models

Here’s a picture of a non-blockchain discount token; a loyalty card for our local café. I know the exact value of this token, it’s worth 1 hot drink after I bought 6 for the regular price.

In the first part of this series I gave an overview of what a blockchain token is and what the difference between fungible and non-fungible tokens are. In this blog post I will talk about what different kinds purposes a token can serve.

Note; I made some minor but important edits to part 1 of this series. It might be a good idea to go back and skim that blog post again for a complete overview.

Below I will go through three high-level categories of tokens; (a) currency tokens, (b) security tokens, and © utility tokens. The latter will be broken down into four sub-categories. I will describe each category in a bit more detail, and in the next part 3 of this series I will talk about methods to do price valuation of each kind of token.

A. Currency tokens

The purpose of a currency token is simply to act as a means of exchange and/or store value. The original example of this in the world of crypto is of course Bitcoin (BTC). But other currencies would include Monero (XMR) and Dai (DAI).

There’s of course nuances within this category, i.e. Bitcoin doesn’t serve well as a means of exchange because of it’s deflationary construction, but in contract it therefore serves as a decent store of value. On the other hand, Dai is a stable coin that would serve well as both means of exchange and store of value.

B. Security tokens

In this context, we’re talking about financial securities as in financial equity. That is, the right to revenue sharing tied to the performance of a company or other organisation. Traditional examples would be stocks in companies.

Securities have existed in our financial system for a long time and are heavily regulated and taxed by most governments. But because of the nature of the wide-spread liberalism in the blockchain ecosystem, most projects seemingly try to steer clear of being labeled as a security while in fact most tokens should be registered as such with governments.

However, some projects attempt to approach this space in a regulatory and compliant manner, i.e. Polymath (POLY)

C. Utility tokens

Utility tokens can be broken down into four sub-categories; (1) work tokens, (2) governance tokens, (3) discount tokens and (4) burn-and-mint tokens.

1. Work tokens

With the work token model, actors will stake (i.e. bond) tokens or some other native resource in order to do some kind of work, or provide some kind of service, on a network. The actor will usually receive rewards for correct work, or payment for good services. However, actors also risk to lose their stake if they do something incorrect or false. On a macro level when this is done right, this model will incentivise the right kind behaviour on the network and drive value it the form of utility.

Once Ethereum (ETH) has moved to proof-of-stake, its native token will be a pure work token. Other examples of work tokens include Augur (REP), Filecoin (FIL) or Kyber Network (KNC).

I truly believe that the world will move towards implementing systems and mechanisms that are designed to balance incentives based on first principles and rational behaviours, such as the aforementioned tokens. However, there’s a big educational and behavioural gap to get there, and it will take many years until these kinds of systems become the norm for every-day use.

2. Governance tokens

Governance tokens is one of the simplest token models. If you own a governance token in a network, then you own a proportionate influence in governing the rules of that network. An over simplification would be; the more tokens you won, the more important your vote is.

here aren’t many pure governance tokens out there. The main one I can think of is Aragon (ANT), who are using their native ANT token to govern the rules of their jurisdiction. However, there’s quite a few work/governance hybrid tokens out there, such as 0x project (ZRX) and Melonport (MLN).

While this is a very simple model to understand, I’m not a big fan because I’m generally against plutocracy and all of its infinite variants. Such a model won’t necessarily maintain the balance of interests between everyone involved in the network. That said, having a governance token doesn’t make a project bad. For example, I do believe in the utility and technical success of the aforementioned projects, but I don’t necessarily believe that the success will be reflected in the price of their governance tokens.

See my blog post about How Governance Works on the Ethereum Blockchain for more reading on this.

3. Discount tokens

This is probably my favourite kind of token model.

Firstly, everyone understands what discount vouchers are and how they work, the concept have existed for hundreds of years. If you buy something without a discount voucher you pay the regular price, if you buy the same thing with a discount voucher you pay less. Simple.

Secondly, it’s quite straight forward to do price valuation of a discount token. An over-simplified model would say that all discount tokens on a network should be worth as much as the total amount of fees being paid. However, that doesn’t mean the value of a discount token is fixed or can’t increase (e.g. the value will most likely increase if the supply of tokens is fixed but the network value grows). It just gives a much clearer and easer way to evaluate a token and doesn’t give as much room for speculators to speculate on.

The value and use of discount tokens have recently been proven, especially through the recent crypto market bubble. Some of the least volatile token prices have been those of discount tokens, like the Binance Coin (BNB) and DigixDAO (DGD). Their prices also tend to be less correlated to the rest of the crypto market, just because there’s less speculative value built-in.

I can highly recommend CoinFund’s blog post about The Fundamentals of Discount Tokens.

4. Burn-and-mint tokens

I won’t go into any details of this burn-and-mint token model here, because it’s fairly complicated. But if you want to read about what this is, I can highly recommend MultiCoin Capital’s blog post about New Models for Utility Tokens, where this model is mentioned in some detail.

One example of a burn-and-mint token is Factom (FCT).