Tokens are here, fungible and NFT

Previously, we’ve covered the nature of smart-contracts, their basic mechanics and objectives.

  • Blockachain = network of accounts.
  • There is an economically stable model used in most blockchains. 
  • Decentralization is expensive.
    Incentivization of parties and Economic balance costs a lot and it is reflected in every transaction.
  • Permissionless.
    There is a possibility to use accounts and create new algorithms of interactions without asking anybody. Interactions can be algorithmized, coded and planned with the help of smart-contracts. New users can check it and interact with them as is in any moment in any possible way.


So, the introduction of a smart-contract layer allowed for significantly more robust interactions between actors than a previous classic blockchain model (Bitcoin). And these complex operations implied moving around large quantities of digital assets with attached strings and conditions. These assets were created with the introduction of smart-contracts. They are called tokens. Designed with utility in mind, they provide access to smart-contracts and are responsible for an internal token economic system.

What are tokens?

Going hand in hand with smart-contracts, tokens work basically as programmable money and smart-contract is how they are programmed.

Token is a unit of account in a certain network. For example, the gold in the World of Warcraft is a token in the network of the game, or the money in Monopoly, or Disney dollars.

But the sweet detail about tokens on blockchain is that they are programable. 

With the help of blockchain and smart-contracts, we can program complex processes with tokens. Going back to the WoW gold, we can set a set of conditions, such as:

  • The gold cannot be accessed by a player with level 9 or lower.
  • Each transaction sends a 1% fee to a Guild Treasury
  • The gold cannot be spent without the permission of the Guild leader.

The algorithmization of blockchain allows to create these types of programmable digital gold, or use other existing tokens and add other conditions to them.

If we would go back to our example from the Digitalization article – the “Diaper Bulk Buy” WhatsApp group – we can take a vaucher and add a condition that it cannot be sold with over 20% margin, or more than once a day.

How do tokens work? And who is paying for this?

If we’re dealing with any type of token, it is inevitably built on some basic model of interaction in a blockchain. This model is what is called a cryptoсurrency or a basic token. If we consider a basic token in a certain blockchain, we are dealing with a blank, basic transaction resource. 

For better understanding of basic tokens, similarities can be drawn with trading a physical world commodity – oil. 

Consider Oil in barrels.

  1. Oil in Barrel is the cryptocurrency (basic token). 
  2. Any other thing in the barrel is a token. Apples for example.
  3. For transferring Barrels between two points we need to provide some oil. All costs of transactions are nominated in Oil. Moving 1 barrel costs 1 cup of oil. 
  4. There can be all types of things inside these barrels. But the fee is always being paid in Oil. So the sender must  have oil to make a transaction.  

Oil stands at the very base of the economic model and is the integral part of each transaction within it. The basic token is an instrument that allows the trading of oil and reflects the cost of the trading IN oil. It’s sort of a “Grease the Wheels” token.

The other way to illustrate the mechanics of basic token or a token standard is to imagine a stack of blank contracts, which were designed to be eligible for use in a certain trading system. These blank contracts essentially act as the basic tokens, which have their own intrinsic value and are completely fungible and interchangeable. 

For example, you can buy and sell ERC-20 – basic token of Ethereum. It’s worth pennies, but it is the same blank, which is used for Tokens, such as Shiba Inu or Chainlink.

There can be different types of these blank contracts employed for different purposes. 

And using these empty contracts to fill them up with specific smart-contracts is what creates specific tokens that we all know and use. 

Our APL barrels can be programmed to only be accessible for users which meet a set of specific requirements, or to be only transferred in packs of 4. You can program any condition that comes to mind and makes your token more economically sufficient. But each new additional condition will add to a “token handling” price in oil.

Ethereum, for example, currently has 5 token standards, or 5 different empty barrels. The most prominent – ERC-20 is usually used for simple tokens, such as voting tokens, staking tokens or virtual currencies. ERC-721 – A standard interface for non-fungible tokens (NFTs), like a digital artwork or a song. And so on. 

All of this is actualized in business practice. And this actualization is integral to the formation of economic models in the crypto community as a whole. So, what types of tokens are there?

The biggest difference between types of tokens is their interchangeability. First of all, let’s take a look at the non-fungible tokens, or NFTs.

NFTs

“NFT” is a completely new standard of Tokens, introduced by Ethereum. The Idea behind them is basic – these are the tokens that cannot be replaced by other tokens. 

These are the tokens with a unique feature embedded in their smart-contract. For example Let’s go back to our stack of blank contacts, take one of them out of the stack, and draw a smiley face on it. Congratulations, you got yourself an NFT! But it’s not all just doodles and dressed up apes, NFTs can carry pieces of code, information, an item in a videogame, a song, a contract or a digital signature. Everything that cannot and should not be replaced or duplicated, and can only be copied.

NFTs often carry only sentimental or artistic value. But they can also be programmed to gain their owner access to certain services and goods, carry important information and useful utility. And their use-cases are broader than is commonly considered. 


For example, NFTs can also be great tools for improving loyalty programs. If loyalty cards are implemented in the NFT format, this will simplify their use and make them more secure. 

With this simplicity, NFTs can be used to tokenize any physical, digital, and smart asset and use them to transfer ownership of the original asset. With this approach, buying and selling all tokenized assets will be as easy as trading cryptocurrencies.

Now for the non-fungible tokens. They all essentially use the same mechanics and utilize smart-contracts, but do it in different ways and with different purposes.

Utility tokens

Utility tokens are simple.  Plain ol’ apples in barrels. 

ERC-20, for example, is one of the prominent standards for Utility tokens. Not to confuse you, but cryptocurrencies are often named “utility” too, because they are used as an oil in their blockchain. But this is not entirely correct.

Utility tokens usually don’t imply any market regulation as they don’t represent ownership and aren’t considered investment products. (Disclaimer: but they kind of are, sometimes) A person can gain access by buying the token and can redeem it for a defined access value to the product or service. 

For example, a developer can create a video game, which requires 1 token to launch. A user can buy these tokens in advance, before the game releases, or at the auction, or in bulk for a cheaper price. Another user can buy it later for a higher price, after the game has been released or in small and well received. 

Those who bought tokens earlier and cheaper can then trade them with those who weren’t so lucky or risky. This creates an internal economic system. So, these tokens, at the end of the day, kind of are investment products.

Stablecoins 

Tokens that are designed to hold a stable value (peg). They can also be built on top of ERC-20 tokens. Their price is pegged to the “real world” currency, for example USDT pegged to USD.

Stablecoins are an essential product of current blockchain interaction and of the overall financial digitalization, frequently applied in exchange chains and as safe, blockchain-based investment and savings units. 

Synthetic Tokens

Synthetic tokens are financial instruments that simulate another tokens’ payoff. In that way, they are synthetic, not the actual asset, hence the name.

Synthetic assets allow investors to trade virtually anything due to tokenization, which brings security and traceability to the process. And it can be applied not only to inner crypto assets, but to real-world assets too. This A new world of investment possibilities can be unlocked for retail and institutional investors. This can occur by fractionalizing real-world assets such as stocks, precious metals, property, and other difficult-to-access assets. Today, more and more DeFi solutions are entering the market as interest in synthetic assets rises.

Result

Tokens are programmable, traceable money, which can exist only within a blockchain. They play a decisive role in supporting and expanding the economic systems of these blockchains. They act as units of trade. Built upon smart-contracts, tokens allow for complex operations within actors and are employed for building new types of decentralized businesses.

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