- Until now, I've been discussing cryptocurrencies,
such as Bitcoin and Litecoin,
which are crypto assets created by a blockchain
and are used as a medium of exchange, a currency.
In other words, they are used to buy things
and, like money, can be a store of value.
Crypto tokens, or just tokens,
are another blockchain-based crypto asset.
They can also be a medium of exchange and store a value,
but they offer much more.
Also, unlike cryptos, they run
on top of existing blockchains,
rather than having their own blockchain like Bitcoin.
Tokens generally represent physical
and digital assets, utilities and services.
For example, they can denote whole or fractional ownership
of any asset that already has value,
such as real estate, a car or corporate stock.
A person could own a token that represents
a 5% share of a famous oil painting.
One of the most popular new types
of tokens are non-fungible tokens or NFTs.
These tokens are denoted by an entry in a blockchain,
such as Ethereum, that proves ownership of an asset.
For example, if a person purchases
a virtually-signed digital picture,
a record in Ethereum will be created
that captures all relevant ownership data.
This virtual non-fungible token,
meaning it is unique, irreplaceable and not equal
to another token, can be resold, thus creating a viable
and efficient online marketplace for a wide range
of digital and physical assets.
NFTs have enabled new opportunities
for income generation, particularly
for digital creators that had previously
struggled to authenticate ownership
and history for digital assets.
A popular type of token used
to be an initial coin offering or ICO.
ICOs enabled blockchain-based startups
to issue utility tokens for usage
in their products as a means to raise capital.
An investor who bought them relied
on the value of their tokens increasing
as they were used and traded on an exchange.
Between 2013 and 2017, a lot of ICOs were sold
to raise millions of dollars.
However, the approach soon fell out
of popularity as many lost money,
and regulators increased their legal scrutiny.
ICO utility tokens still exist, but they are relatively rare
and conform to a higher degree of diligence.
Instead of ICOs, another form of token,
a security token, has begun to gain popularity.
Security token offerings or STOs, unlike ICOs,
issue tokens for an investment contract
in an underlying investment asset, such as a stock or bond.
The security token captures all
ownership information in a blockchain record.
STOs have a much higher degree of oversight.
For example, they must conform with financial regulations,
such as KYC or know your customer and AML
or anti-money laundering laws.
Recently blockchain and in particular, Ethereum, has started
to be used for a new set of financial services
called decentralized finance or DeFi.
These innovative solutions provide
lower cost, more accessible, more open
and higher-speed financial services
that range from lending to insurance.
DeFi tokens perform several important functions,
such as facilitating trading, payments and investments.
Right now, perhaps, the most popular are governance tokens.
These are issued to users to represent voting rights
that can be exercised to influence the operations
and future development of a DeFi solution.
Other DeFi tokens include fee tokens, which are
used to facilitate banking fees, and collateral tokens,
which supply and support loan liquidity.
The characteristics of how supply
and demand of cryptocurrencies
and tokens function is known as tokenomics.
Understanding tokenomics can help you determine
what role you might play as a consumer,
developer, investor or business leader.
For example, when considering a cryptocurrency,
what questions might you ask?
You might consider if there are a finite
or infinite number of cryptos being issued.
Bitcoin, for example, is limited
to a total of 21 million coins.
You might track market capitalization,
trading volume, price stability and number of participants.
For investing in tokens, it is wise understand
the leadership, talent and technology behind them.
In 2009, Bitcoin launched as a single cryptocurrency.
Over a decade and thousands of cryptos
and tokens later, the space has grown
to be a multi-trillion-dollar market cap,
and it's really just getting started.
No doubt, the next few will be revealing
about where tokenomics are headed.