Cripto247: What are the three types of tokens and how do they differ from cryptocurrencies?

Tokens Vs. Cryptocurrencies – How Do They Differ?

News | October 21, 2018 By:

A currency (the dollar or the euro, for example) can function as a store of value and a means of exchange, but a token can do many other things. […] There are differences between cryptocurrencies and cryptotokens, although they are quite subtle indeed. The important thing for the investor is that in both you can invest and obtain a profit in case of a rise in the price. Let’s see a little more technically what each one consists of.

THE COINS

Bitcoin invented the category digital coins (coins). Then there were many others that offer alternatives regarding the characteristics of value reserve and money transfer. Unlike tokens, what a coin can “do” is quite limited. Some examples of currency are Dash, Zcash or Litecoin. Compared to bitcoins, they are more anonymous and faster (in addition to other features). For example, what Litecoin modified with respect to bitcoin is the mining algorithm it uses, the total amount of coins and the times to generate each block.

THE TOKENS

A token is a piece of programming code, in intelligent contract format, that runs on a blockchain. The programming code describes how that token will behave, and its database simply keeps track of how many tokens each person has.

With ethereum, who invented the category of intelligent contracts, the “digital chips” (a horrible translation of a token) were born. Because of the programming language in which it was built and because it was thought for that purpose, Ethereum works as a platform that allows pieces of code to be added to execute certain specific functions mounted on its blockchain.

So a token is the naphtha with which these different pieces of code work that do certain specific things. Another way to say the same: it is a specific application mounted on a platform of intelligent contracts (Ethereum). And to work, they need a specific token. For example, Augur (decentralized platform of predictions) and Storj (decentralized hosting) can develop their application much more easily, and launch their token in an ICO or Token Generation Event, in a simpler way because they are implemented on the Ethereum platform, already armed, solid, scalable.

Each of these projects mounted on the ethereum platform, in turn, pays fees for use in ETH to the transaction validators.

It is more an ecosystem around ethereum that tries to turn it into a supercomputer, with functions expanded by each application that is built

on that platform, and that circulates thanks to the tokens launched by each application.

Now that we understand the fundamental difference between the two, we can see more clearly that the world will be tokenized. Although all, to simplify, call coins to the tokens, we will know the difference.

A. Krishnakumar, senior partner of the blockchain practice at PwC India, said: “The global securities market is 100,000,000 million (in English it’s called trillions) and 100% of that can and will be tokenized.”

TYPES OF TOKENS

Currently, most ICOs are based on ethereum ,because it is a more flexible blockchain than bitcoin and, without doubt, it is much faster to put some project in production that build your own blockchain (it’s taking Tezos months to finish developing yours).

The tokens based on ethereum are called ERC-20 (there could be other tokens based on other blockchains than Ethereum, but since it is more specific we will not go into that). What the ERC-20 does on a timely basis is to keep the address of the wallet to which they belong, and the balance they have left available to use.

Once someone sends a token, the issuer’s balance decreases, and that of the receiver increases. That’s all, very simple. It is an accounting book that registers who has how much, who transferred how much and to whom. In this way it is easy for any startup to create and launch a new token to the market.

There are basically three types of cryptotokens:

1) TOKEN AS A FINANCIAL ASSET (SECURITY TOKEN)

A token is considered a financial asset if it can be bought and sold in public markets (tradear). In mid-2017, the SEC of the United States warned that if they classify the token of an ICO as “security”, it falls under the regulation that has any “normal” financial asset. And it has very strict guidelines, mostly for

protect the general public from being deceived with a false promise of an astronomical return.

As of that moment no ICO went out to offer tokens that can be cataloged like “securities” by the SEC. Nobody wants to be the scapegoat and go to jail for launching a token of this type, without having done all the cumbersome legal process required, such as offering your token to sophisticated investors only.

One of the points mentioned by the SEC is clear: it is not allowed to advertise massively a financial investment opportunity where any individual can invest. Obviously a project that actively promotes its ICO, and whose token was listed as a financial asset, would be doing something totally forbidden.

The SEC states that for a token to be considered “security” it has to pass the Howey test. That test is to verify that:

-NOT is an investment of money.

– NO expectation of profit.

– It is NOT based primarily on the efforts of others.

2) TOKEN OF UTILITY (UTILITY TOKEN)

Filecoin, a utility token, raised USD 257 million in its ICO by promising investors that in the future they will be able to use the tokens they bought to store files in their decentralized cloud

Filecoin, a utility token, raised USD 257 million in its ICO by promising investors that in the future they will be able to use the tokens they bought to store files in their decentralized cloud

Depending on how you look at it, practically all tokens would fall under the category of financial assets given that most investors in ICO expect a return through the potential increase in the value of the token over time. However, if a token does not qualify in any of the 3 points of the Howey test, it can not be considered a “security”.

A utility token is basically a promise of future use in the platform for whoever owns it: the consumption of the service with that token is paid.

The appreciation of value arises from a limited offer of these tokens (no more than a certain amount is issued); that is, if the

Demand for that service goes up, consequently it would increase the value of that token.

Projects do not have to promote their ICO as an investment opportunity to make money, but to buy a token that they will be able to use to pay for the service offered afterwards. The price increase is a

consequence of the success of your value proposition to the market. You could also call them “Network Access Tokens” because the token allows you to pay to use that platform to do something.

As an example we can mention Filecoin, which plans to offer decentralized storage in the cloud, by taking space available in the hard disks of the computers of network members. Who participated in the record

ICO (they raised more than 257 million dollars in a few days) will be able to use those tokens to buy storage space at Filecoin when they launch the service. From the legal point of view, they should be covered if they do not allow those tokens to be exchanged for other goods or services outside the ecosystem for which they were created. The value of the token will be given by the demand of the users to power the decentralized app (DApp) that is.

The tokens that are being created as incentive programs, of frequent mileage, would fall into this category: they would be used, for example, to pay for new tickets on American Airlines.

In addition to Filecoin we can mention Ripple and Ethereum, among others.

3) TOKEN OF ACTIONS (EQUITY TOKEN)

Represents ownership of a part of an organization. With this type of token it is much easier to have shares of a company, mainly a new one, a startup.

One of the advantages compared to typical actions is that, through the tokens, shareholders can have a more active role in the governance of that venture: for example, it is possible to make voting faster, easier and more transparent through a blockchain.

Due mainly to the lack of regulatory framework, almost no enterprise launched a stock token. It is important to note that Delaware proposed a law that allows companies located in that State to maintain a list of the names of the shareholders in a blockchain to

Unlike traditional methods. It’s only a matter of time until this type of token gains popularity.

This article was originally published in Spanish at Cripto247.com