Crypto unchained - chapter 6

Chapter 6:

Heads or tails, Coins & Tokens

There’s a crucial difference between coins and tokens that shape how they function.

Coins:

Have their own blockchain, and as such a distributed governance.
Primary function is as money or infrastructure.

Tokens:

Built on top of an existing blockchain and operate via a smart contract.
The resulting governance is centralised.
It can represent anything: currency, access right, digital assets, etc.

This difference between coins and tokens not only shapes how they function but carries various trade-offs for market participants.

More on Coins

“Coins are…”

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Coins are the first type of crypto-asset that existed. The creation of a coin is challenging. Not only it requires the writing of a comprehensive source code, it also depends on widespread adoption such that the aggregation of individuals to form a distributed network. There are three subcategories of coins: cryptocurrencies, service crypto-assets and smart contract platforms.

Cryptocurrencies, of which Bitcoin is the most prominent illustration, belong to the first group of crypto-assets created. As mentioned above, crypto-currencies are a special case within the ecosystem because the incentive mechanism for nodes, and the service provided to users are identical, i.e. a payment system.

Service crypto-assets extend the realm of this emerging asset class by providing services that go beyond payment systems. Above we discussed the examples of Filecoin, which provides users with cloud-storage. Rather than validating transaction, nodes provide the users with storage capacities in exchange for filecoins native currency. This illustrates well the distinction between incentive mechanism (payment system) and a provided service (cloud storage).

Lastly, smart contract platforms open even broader the spectrum of possibilities in the crypto-asset ecosystem. By introducing smart contracts, users are free to transact, interact, and contract freely.

The latter subcategory has played a pivotal role in the development of the crypto-asset ecosystem in the last decade. With the introduction of smart contracts, it became obsolete for developers in most cases to develop a new blockchain. Instead, leveraging the infrastructure of existing crypto-assets was sufficient in a majority of projects. As a result, for the past decade the number of tokens has grown exponentially, and they now constitute the lion’s share of traded crypto-assets.

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“Tokens are…”

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There are two subcategories of tokens: DApps and tokenized assets. Within DApps we further distinguish between utility tokens and governance tokens. Utility tokens can be seen as a ticket to an event whereas governance tokens capture ownership of the place where the said event takes place. While utility tokens are consumed to access the service governance tokens, just like shares, it gives holders the opportunity to take part in the decision-making process of that token. It is worth noticing that governance tokens, unlike shares, are not regulated and as such the voting rights of the owner are not necessarily well defined.

Tokenized assets, represent a claim on another asset. It means that the ownership of any traditional or crypto-asset can be tokenized. Depending on whether the tokenized asset is unique, we can further distinguish between fungible and non-fungible tokens.

The most prominent asset of fungible tokens is the stablecoin Tether. While rom a technological perspective, it is a token rather than a coin, the term stablecoin is now commonly accepted to describe this kind of token. Stablecoins represent a 1-to-1 claim on an underlying fiat currency, generally USD. The advocated benefits are instant global transferability as well as access to products and services that are only accessible to crypto-assets and traditional fiat currencies holders (e.g. exchanges and other trading platforms). By representing a claim on real world asset, fungible tokens constitute a link between traditional and crypto-assets. It is almost ironic that what can be considered the most ‘stable’ part of the crypto-asset ecosystem actaully represents a potential spillover channel and, as such, a regulatory risk.

Finally, non-fungible tokens (NFTs), for their part, offer ownership over unique and indivisible digital asset (e.g. the Mona Lisa). While there are occasional trends of NFTs, it appears as if the full potential has not yet been exploited. Enthusiasts are currently studying the viability of treating in-app or in-game purchases as NFTs. This could not only allow for unique identification but also pave the way for secondary marketplace and lending platforms in the gaming industry.

Coins

Crypto-currencies

Infrastructure crypto-assets

Service crypto-assets

Infrastructure crypto-assets

Smart contract platform

Tokens

Distributed Apps

Tokenized assets

Utility tokens

Governance tokens

Fungible tokens

Non-fungible tokens

To sum up, coins and tokens are the two main types of crypto-assets:

Coins have their own blockchain and the inherent distributed network yields a well-defined democratic governance structure.
Tokens are built on existing blockchain and leverage smart contracts.
Compared to coins, tokens often have a centralized governance, as the developers of smart contracts can easily attribute themselves all administrator rights.

Chapter 7:

Risks and scams

While the crypto-asset ecosystem presents a plethora of opportunities, the emerging asset class is also prone to scams and risks.

Read chapter 7

Into the wild

A new world

Money rules the world

From Wallets to Smart Contracts

The rise of DApps

Heads or tails, Coins & Tokens

Risks and scams

Outlook

Crypto’s Decentralization Dilemma

Heads or tails, Coins & Tokens

More on Coins

More on Tokens

Risks and scams

Stay tuned