Establishing a consistent and reliable taxonomy for the token properties and also classification model is compulsory to lay down a foundation from which developers, policymakers as well as investors can think of how to design, apply or regulate tokens.
All the authorities around the world are trying to understand the full potential and its implications. It is very hard to understand at such an early stage what is truly new, from existing assets classes represented by a new derivative. Some tokens might represent new asset classes, like native protocol token that has hybrid functions very often which are not easy to classify.
It is a very initial stage of exploring the various roles and types of tokens with every new blockchain and new token application. We will learn by trial error about every possible use of cryptographic tokens which results in classifications thereof.
Properties of Tokens :
Identification of different properties of a token will be used as a first step to finetune a future classification framework. It will also be used for modeling techniques in developing a token. To explore all the possible solutions to a multi-dimensional, non-quantified complex problem, Morphological Analysis can be used. This method is used for the structuring of questions in the first approach in a heuristic way.
There are certain properties by which we can deduce properties of a token :
i) Technical Perspective :
From this perspective, tokens can be implemented on various layers of the technology stack, either as
(a) protocol token or as
(b) Second layer tokens.
Sidechains are separate blockchains compatible with the mainchain, which is used to resolve scalability issues in Bitcoins. Protocol coins also are known as intrinsic, native, or built-in-token which has a clear role blockchain, i.e. to keep the network safe from attack by acting as a block validation incentives and for transaction spam prevention.
(ii) Right Perspective :
Tokens can be represented as a right to some underlying economic value, whether it be digital or physical, long term or temporary basis. A token can be used to represent (a) A right to an asset you own, which can be the unit of account or a unique good.
(b) To provide limited access right to an asset someone else owns. The definition of an asset is ‘ A resource which has an economic value and is controlled by an individual or a legal entity or a country.
(iii) Fungibility Perspective :
Fungibility means the interchangeability of a unit of a commodity with other units of the same commodity. Examples – Any Durable Goods. Fungible Assets have two main properties :
(a) Quantity Matters Only – It means that the units of fungible assets of the same kind are indifferentiable.
(b) Any amount can be merged or divided into a larger or smaller amount of it.
The more easily a token is divisible, the more fungible the token is. Divisibility means the fact that you can send a fraction of a token to someone else.
(iv) Transferability Perspective :
Tokens can be both transferable or non-transferable or it can be restricted transferability. Depending on the use of the case, the transferability of Unique tokens depends. A plane ticket might be transferable or non-transferable depending on its type.
(v) Durability Perspective :
Durability means the ability of a currency to withstand repeated use. Metals or wheat have high durability and hence were used as commodity money earlier. Bitcoin token and similar native blockchain token have so far proved to withstand time. It is very resilient against the type of censorship or any network attack.
(vi) Regulatory Perspective :
Regulation is a very complex topic. In simple words, we can say that regulators need a clear taxonomy of the different types of token which helps to understand what they are potentially regulating. Some of these tokens are very simple to classify as well as regulate, as it rejects known phenomena, unlike other types of tokens which is much harder to regulate and classify, especially the other ones that have hybrid functions.
(vii) Purpose Perspective :
Against the tokens that represent already existing assets or access rights to an asset or service someone else owns, a token can also be used to program a incentivize a new way of creation of collective value. Tokens can be used to incentivize individual behavior. Bitcoins and other protocol tokens are an example of such purpose – drive tokens.
(viii) Token Supply Perspective :
Poker chips have fixed prices and unlimited supply as well. Many of the tokens that are listed on coin market cap, especially those which were used for early token sales to raise funds have limited supply maybe because no investor wants to buy into an unlimited supply.
(ix) Tokens Flow Perspective :
Tokens can be created for a single purpose and destroyed when used. They flow in a straight line. Examples – Casino chips that can be used within the realm of the casino. Once a player leaves, they can cash it back into local currency. These tokens must be destroyed after consumption to complete the cycle.