A token is a unit of virtual currency. Most tokens are built on a blockchain-based cryptocurrency platform, such as Ethereum. Building on top of a platform like Ethereum allows these tokens to form their own financial ecosystem while leveraging the scale of an existing currency.
Tokens became highly popular in early 2018, with the boom in ICOs–initial coin offerings. Many of these coins offer a value proposition of a “utility token.” The idea of a utility token is that the token is necessary to transact in a particular ecosystem. If Amazon were to require you to convert US dollars to Amazon coins in order to buy items on Amazon, the Amazon coin would be a “utility token.” There are many different kinds of utility token schemes, and time will tell if this model makes sense for the cryptocurrency investment landscape.
Another type of token is the “security token,” in which a token represents a share in an organization. This token type is more like a stock, or bond, or certificate of ownership of a financial instrument. These types of tokens also have their share of criticism. If I start a company, most of my assets are not represented on a blockchain–the assets are things like hiring contracts, intellectual property, real estate, etc. The legal ownership of these assets is settled by a complicated legal system which has no notion of a blockchain. It’s unclear how the claims of a security token today would be enforced–or why a security token is presently a better option for raising capital than traditional equity or debt instruments.
Felipe Pereira is the author of “On the immaturity of tokenized value capture mechanisms,” a Medium article in which he documents different types of token systems, including several flavors of utility tokens and security tokens. He’s also the co-founder at a company called Paratii. He joins the show to discuss the present viability of token-based systems–and what blockchains have actually proven to be useful for today.
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