Chapter 5. The Need for a Token

Blockchain and smart contract technologies have unleashed the ability to create all sorts of tokens, as highlighted in the previous chapter, including an increasing number of applications and tools to help to make the token creation process easier.

However, the most important question before we all rush out and start tokenizing the world is: what is the purpose of the token? Is it to access an application's service or product? Is it to incentivize users to grow an application or platform network? Is it, perhaps, to make an illiquid asset liquid? Is it purely to raise capital? Quite often, the answer is that a token starts out having one purpose and then changes to having a purpose that is a combination of all of the preceding points.

In this chapter, we will look at the following topics:

• Did these ICOs really need a token?

• Types of companies running ICOs

• Critical considerations when creating a token

There is no shortage of opinions on whether any new project in...

The purpose of a token

All tokens in an ICO need to have a purpose and a function, and there are a number of models and definitions available discussing the various characteristics of tokens.

To help us to understand tokens, we can consider the money in our wallets. People work and produce goods or services, thus producing economic value. This value is exchanged for money and then the money can be spent on needs and wants, sometimes not necessarily in that order. The government controls the money supply and changes various aspects of it based on monetary and fiscal policies. The money we earn is spent within a country and if we want to spend overseas, we need to exchange it. This then creates the economy that we all participate in.

Let's now look at ICO projects where we have tokens. People work and produce value in exchange for tokens. The work can be in the form of producing content, such as blogs or videos, or the user giving their attention to an advertisement. The tokens can only be spent...

Did these ICOs really need a blockchain?

We may have established whether these ICOs needed their own tokens or not, but did they need a blockchain? The ICOs that didn't need a token may or may not have required a blockchain, but there is a growing argument that suggests that although blockchain technologies are relatively new and still evolving, we could be only a handful of years away from a situation where the question will be reversed to: why would you not build your business using the blockchain?

There are several reasons why a blockchain is useful:

• Using a blockchain means that you don't have to build or own any databases. The blockchain concept, or system of blockchains, provides this already. Think of Ethereum connected to distributed file systems, such as the Inter Planetary File System (IPFS), Storj, or Sia.

• Traditional systems generally use centralized servers, making them juicy targets for malicious attacks. Equifax, Target, and Sony may ring a bell. Instead of having a small group...

Types of companies running ICOs

There are two broad categories of companies running ICOs and creating their own tokens. The first and most popular category is new blockchain-based startups that plan to revolutionize the world and decentralize everything in their path. Then there are existing and established companies that want to jump on this ICO train and explore the new opportunities available. We will first explore existing companies and how they participated in the ICO craze.

Existing companies running ICOs

There are typically two categories of companies that enter the ICO space: companies that already use some sort of virtual currencies or loyalty reward systems and see crypto tokens as a natural evolution, and companies that don't but want to change their strategy to include a token of some sort. One of the most popular industries that uses virtual currencies is the gaming industry.

GameCredits (GAME)

Virtual currencies in computer games have been around for a long time but they only really...

Critical considerations when creating a token

There are several reasons for wanting to create a token. Firstly, it is a fun exercise to demystify the technology and understand at a deeper level how tokens work. The second, more serious, reason is to participate in this token economy and provide added value to either existing or new products and services.

Whatever the reason, the first step is to understand the purpose and function of your token. The next step is to decide if an existing token can be used or if a custom token is required. The final step is then to ask if a blockchain or distributed ledger is required. Following on from the concepts of the thought experiments earlier, let's go through the steps of how a token would be created.

Step one – the purpose of the token

As highlighted earlier, tokens can fall into three main categories: payment, utility, or security. Is the token designed as a form of payment? If yes, will an existing cryptocurrency or payment token, such as bitcoin...

Summary

The question is not whether the world needs all these digital tokens that have proliferated on various blockchains, but what are we going to do with all these tokens? The physical world is largely represented as tokens and this shift into the digital realm is no different to the fax machine or the printing press being transformed, as technology innovates and disrupts and changes the world around us.

In this chapter, we went through some thought experiments to determine if some ICOs needed their own custom token and saw arguments both for and against. Several different companies running ICOs were examined, where the conclusion was that the more established a company was in terms of having an existing user base or a working product, the more successful the ICO was.

Finally, three main questions were highlighted around creating a token, which were to define the purpose of token, whether an existing token or custom token should be created, and if a blockchain is required as part of the...