Why Tokens Matter

Whats a token?  Why should we use it as a means of payment.  How does it change how we do business?Is it inevitable we will tokenize?     Dr Rijmenam writes about it.

Why Tokens Matter and How to Clarify a Path Towards Tokenisation
November 6, 2019 | Blockchain Blog | Dr Mark van Rijmenam

The organisation of tomorrow, despite differences in industry, location, products and services on offer, will all have one thing in common: they will use some sort of token as the key enabler to their business. Organisations have multiple options when selecting the type of crypto token. The token economics they opt for influences the likelihood of success for the organisation. Tokens are the fuel of the decentralised economy and William Mougayar, the author of The Business Blockchain and Managing Partner and Chief Investment Officer at JM3 Capital, describes a token as:

“A unit of value that an organisation creates to self-govern its business model, and empower its users to interact with its products while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders.”

The usage of tokens in society goes back to antiquity and technologies such as Blockchain can dramatically reduce the cost of secure and trusted token exchange. The potential for tokenisation to disrupt existing interactions is huge – offering more efficient solutions to existing paradigms (e.g. crowdfunding, fractionalised ownership) as well as opening up whole new models for financing and collaboration. One clear example of a use case for tokens is in funding. While crowdfunding has helped democratise funding, far too often worthwhile ventures remain unfunded. Tokens can potentially bridge the gap between organisations in need of funding and investors, who have funds available.

3 Types of Tokens

Although there are over 3000 different tokens, there are three types of tokens: currency tokens, utility tokens, and security tokens.

Currency Tokens

Currency tokens are the most well-known tokens, simply because the first crypto token ever, bitcoin, is a currency token. The value of the token is determined by supply and demand. Contrary to fiat money, which is backed by gold, currency tokens are only backed by the demand and trust in the market. Therefore, a new currency token faces the chicken and egg problem; for a currency token to be used by a lot of people, the currency token needs to have value and high liquidity. However, to have high liquidity and value, there needs to be a lot of users. Therefore, it took bitcoin and ether a lot of time to increase in value.

The more currency tokens there will be, the more difficult it will be to overcome this problem. As a result, in the future, there will only be a few dominant currency tokens. With the problems, Libra is currently experiencing and the opposition of governments and central banks, it is likely that in the future, currency tokens will be predominantly state-created currency tokens such as the crypto Euro, crypto dollar or crypto Renminbi..... "