A gentle introduction to digital tokens, Kattig on blocks

Thoughts on blockchain technology

Significant note: If you own more than $1,000 worth of cryptocurrency then you should undoubtedly be using a hardware wallet instead of keeping coins on exchanges. I recommend a Trezor which you can buy for €89 directly from their webstek.

Digital tokens have come to the fore recently, firstly with excitement about cryptocurrencies such spil bitcoin, then with digital tokens being used to represent different assets on a blockchain. What are they? How can you digitise a token? Why is it significant?

When I hear the word ‘token’ I think of round plastic things like a gokhal chip, or something which I can use to exchange for a teddybeer under a specific system or te a specific marketplace.

My idea of tokens.

Wij will explore the original usage of the phrase ‘digital token’, then take a look into the world of cryptocurrency tokens, differentiating inbetween blockchain-native tokens like BTC on Bitcoin or ETH on Ethereum, and asset-backed tokens like IOUs on Ripple.

DIGITAL TOKENS Ter THE BEGINNING

When you inject an email address into a webstek to join a mailing list, you’re often asked to check your email and click on a verbinding. The verbinding looks something like this:

Te this case, the ‘token’ is this string of characters which wasgoed sent to you. It’s a unique string of characters, which, when you click on it, tells the server that “yep, the boy undoubtedly got the email, so the email account is undoubtedly his.”.

So, the webstek sent you a token, and you sent it back, proving you had control of that email address.

However, ‘token’ is now being used te an entirely different way to mean other things te cryptocurrency land. Let’s explore.

CRYPTOCURRENCY TOKENS

Cryptocurrency tokens don’t exist spil a string like wij witnessed above (if they did, they would be effortless to copy), but rather they exist conceptually spil entries on a ledger (a blockchain). You own thesis ‘tokens’ because you have a key that lets you create a fresh entry on the ledger, re-assigning the ownership to someone else. You don’t store tokens on your rekentuig, you store the keys that let you reassign the quantity.

I choose to think of thesis ‘tokens’ spil specific amounts of digital resources which you control, and you can reassign control to someone else.

We’ll voorkant two types of token:

  1. “intrinsic” or “native” or “built-in” tokens of blockchains
  2. “asset-backed” tokens issued by a party onto a blockchain for straks redemption

1. Intrinsic tokens (also known spil ‘native or ‘built-in’ tokens)

Intrinsic tokens are made-up resources that have some utility.

Some of the more well known examples of intrinsic tokens are:

  • BTC on the Bitcoin blockchain
  • XRP on the Ripple network
  • NXT on the NXT verhoging
  • ETH on Ethereum

Thesis ‘coins’ or ‘tokens’ truly form part of the core of the blockchains, and the blockchains would not run without them. They are usually part of an incentive scheme to encourage people to help validate transactions and create blocks, or te Ripple’s case, they are there to create a petite cost vanaf transaction which helps prevent transaction spam.

How did thesis intrinsic tokens come into existence?

Spil thesis are not backed by anything, they can be created by software, just spil lightly spil you can write down on a sheet of paper “I hereby create 1 billion fun-coins”. Ter fact if you did that, and then kept a good record of which friends you talent thesis to, and if you could record onward transactions spil your friends talent them to other friends, you would be doing pretty much the same spil what thesis digital ledgers do.

For the examples above:

Te Bitcoin, BTC are created (‘mined’) spil they go along, according to a schedule. The freshly created coins are assigned to the block-maker. The total number of bitcoins increases with time. They are optionally added to transactions.

Te Ripple, XRP were created at the beginning (‘pre-mined’) and collective out among key participants. Each transaction has a toverfee costing a puny amount of XRP. Thesis XRPs are ruined overheen time, and not re-assigned to the transaction validators. The total number of XRPs te circulation goes down with time.

Ter NXT, NXT coins were pre-mined. Each transaction on the NXT network has a toverfee ter NXT. The toverfee goes to the block-maker (te NXT this is called a ‘forger’ instead of a ‘miner’). The total number of NXT remains onveranderlijk with time.

Te Ethereum, ETH (‘Ether’) wasgoed pre-mined. Transactions and wise contracts need ETH to create and run, and the ETH go to the block-maker spil a prize. The block-maker also gets a block prize.

A selection of distributed ledger systems and their intrinsic tokens.

Purpose. The main purposes of intrinsic tokens seem to be:

  1. Block validation incentives (‘miner prizes’)
  2. Transaction spam prevention (if all transactions cost some token, it thresholds the capability to spam)

Albeit thesis coins have outer value (you can buy and sell any of them on an online exchange for other cryptocurrencies or real money), they aren’t meant to represent anything. They just are.

Asset backed tokens are claims on an underlying asset, from a specific issuer.

Wikipedia’s History of money suggests that ter the good old days, you could park some gold with a goldsmith, and receive a receipt or “I Owe You” (IOU) note from them. Thesis notes could be transferred from person to person, and anyone holding thesis notes could go back to the goldsmith and voorkeur the actual gold.

Asset-backed tokens are the digital omschrijving. They are claims on an underlying asset (like the gold), that you need to voorkoop from a specific issuer (the goldsmith). The transactions spil tokens get passed inbetween people are recorded on the blockchains, and to voorkeur the underlying asset, you send your token to the issuer, and the issuer sends you the underlying asset.

Popular assets for thesis schemes are currency (USD, EUR, etc) and precious metals (Cryptocurrencies seem to attract the same crowd spil gold and silver). But read the press and every day you’ll see people tracking assets on ledgers by creating a digital token that represents them. Diamonds, kunst, music… you name it.

How do asset-backed tokens work?

Let’s take the example of Coins-R-Us, a fictitious Bitcoin exchange, issuing Euro-backed digital tokens.

You send Coins-R-Us some money by logging on to your online banking, and making a normal EUR handelsbank payment to Coins-R-Us’ bankgebouw account for E100. When they loom te and see it, they can give you 100 digital asset-backed tokens called Coins-R-Us-EUR.

The creation of thesis tokens is recorded on a blockchain (whether it’s coloured coins on The Bitcoin Blockchain, or assets on Ripple or NXT, or a wise contract on Ethereum, it doesn’t indeed matter for thesis purposes). You can then send thesis tokens to your friends (either te terugwedstrijd for something or spil a bounty), and the tokens proceed to be tracked on the same blockchain.

Eventually one friend will want to convert this asset-backed token for something real. She would need to go back to Coins-R-Us, create an account with them, tell them hier canap account number, and send them the Coins-R-Us-EUR that she got from you. They would then transfer hier some EUR from their canap account to hier bankgebouw account.

Asset-backed tokens are wonderful te being effortless to transfer, with good record-keeping, but on redemption, you still rely on the issuer being liquid.

TOKENLESS BLOCKCHAINS

Ter some discussions, including Tim Swanson’s excellent report on permissioned ledgers, there is the concept of tokenless blockchains. I think this means a blockchain or distributed ledger which lacks an intrinsic token (eg Ripple without the XRP), however asset-backed tokens are likely to still be used. The ‘tokenless’ refers to lack of intrinsic token, and not lack of asset-backed token.

You don’t always need a token. Depending on the setup of the blockchain system, you may or may not need an intrinsic token.

Ter general, permissionless ledgers where anyone can add a block, need some sort of incentivisation scheme for block validators to do their job. However ter distributed ledger systems where you control the validators and block-creators, then they may be doing their job for different reasons, for example because they are contractually obligated to do so. There’s a little more on it here.

DEMATERIALISATION AND TOKENISING LEGAL CONSTRUCTS

Presently there is a loterijlot of noise te the media around putting things on blockchains: shares, debt, gold, companies, IPOs, diamonds, kunst, decentralised organisations, wine, music, countries and so on.

Sometimes the purpose is to be able to transfer assets (or rather IOUs) quickly and lightly while keeping the physical voorwerp secure ter a warehouse.

Other times it’s to have a digital token whose digital ownership matches the physical journey object. For example when I sell you a physical diamond, I also send you the digital diamond-token from my control to your control, and so the blockchain records the provenance of the diamond, like a supercharged certificate-of-origin which includes a total record of ownership.

Regarding legal constructs, especially companies and shares, I think there is a difference inbetween tracking claims to underlying objects on a ledger, and actually legally dematerialising the object.

Dematerialising something means substituting a material object with a digital one. For example paper share certificates have now mostly bot substituted by ownership registers ter databases. Some paper contracts have bot substituted with pdf files.

While you can announce “this digital token represents a share of a company”, and you can send that to someone else, this has no legal bearing. The token isn’t the share, even if you own the share ter real life, and you kwestie the token on the back of it. The token is something outside the law which you have invented.

Sure, spil the possessor of shares, you may commit to other people that if they own so-and-so token, then you will pass them certain privileges (for example if you own this token, I will pass any dividends I get (from indeed possessing the share) to you).

However, you own the share because your name is on the share registry, the real legal share registry, not the blockchain ledger which you are using to track the digital token you have created.

This is why I cringe when I hear people telling they are creating *insert legal construct here* on the/a/some blockchain. They aren’t, any more than I can create a company by writing “I hereby create a company with 100 shares” on a napkin, without doing all the real work of legal company creation with the company register of my national jurisdiction.

Sure, if the law switched and by statute a specific blockchain became, or wasgoed deemed omschrijving to the national register of companies, then yes, on that statutory blockchain, you could create a company. It will be interesting to see how laws will eventually adapt to technology.

Related movie: #MovendoDinheiro com Eobot e Gridseed Asic Miner.


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