Author: Jean Chalopin

If you wish to either evaluate a token or develop one of your own, you should understand the differences between the types of tokens. New users join the blockchain world daily, including politicians, regulators, and other decision-makers who can significantly influence the future of this technology. 

They will need clear and relevant knowledge of blockchain’s innerworkings so to make informed decisions. The best tool we have found for evaluating and separating tokens into different categories was created by Untitled INC.

This framework has multiple uses. It incorporates all the current token types and enables readers to draw distinct lines between them. 

Its development is ongoing but free for all. It was released for free use under a Creative Commons BY-NC-SA license allowing anyone to share, copy, redistribute it in any format, and to remix, transform, and build upon the material.

It’s a living document. As the field expands, extra dimensions may be added to the framework.

Five Dimensions

Tokens can be divided into five dimensions. 

These five dimensions are: 

1. Purpose. What is the token designed to do?  Misunderstanding the token’s purpose leads to incorrectly calling it a cryptocurrency. It can be used as a cryptocurrency, or it can aid a network’s growth (network token) or simply act as an avenue of investment (investment token). 
2. Utility. There are four general categories: 
   1. Usage – provides network access or features
   2. Work – provides work to the host system or blockchain
   3. Hybrid – offers both a and b
   4. Useless – no utility
3. Legal status. As more regulation occurs, this category will evolve, and the presiding jurisdiction may alter a token’s classification. If a token provides no network nor service features, or is not a pure cryptocurrency, then it’s usually classified by regulators as a security token. But some tokens will hover between the two. Current legal frameworks were developed before tokens, and they may have to be adapted. 
4. Underlying value. Most tokens are created with underlying monetary values, but the sources of these values differ significantly. They can be IOUs for real assets or rather like stocks with commercial or equity links, values which fluctuate. We do find that the network’s value may determine the token’s value, making valuation more interesting relative to traditional investing. However, value is extremely difficult to determine.
5. Technical layer. Implementation of tokens occurs on different layers of a blockchain-based network. Generally, there are three technical layers:
   1. Blockchain-native tokens – the chain’s native token
   2. Non-native protocol tokens – part of a crypto-economic protocol that sits on the blockchain
   3. DApp tokens – a token on the application level

These five dimensions are complementary, and tokens are not exclusive to only one. Most are assessed through all dimensions. We will see that when we look at the archetypes of tokens, there are strong correlations between them. 

Token Archetypes

Generally, there are four token archetypes:

Cryptocurrencies.These have a use as a store of value (SOV) for wealth, are not controlled by a central authority, and can either be mined or pre-mined. There is no counterparty risk.

Tokenized assets. These provide access to assets such as gold, but also enable microtransactions. The issuing authority has control of the underlying asset, leading to counterparty risk since ownership is tied to one entity. 

Tokenized platform. A platform-like network that is not owned or operated by a central entity. Users start with limited roles, but now roles are available to all network participants. The token’s value, either financially or in terms of utility, moves with the network. 

Shared tokens. This is a tokenized financial instrument for investing in a company, with characteristics of a stock. The tokens improve on the traditional share model by being flexible, and having smart contract programmability. As regulatory frameworks develop, this is the most targeted and vulnerable of the token types.

Tokens As Part of a System for Valuation

Crypto tokens are only one component of a blockchain or distributed network. They are integral but should be evaluated in conjunction with the other two layers of a network: governance and technology.

Evaluating Matrices

It helps to look at some examples to see how the use of a framework aids in valuing any token.

Steem is an incentivized blockchain social media platform that uses three currencies: STEEM, Steam Power, and Steem$. STEEM is used as the currency of the publishing platform, measuring reputations and providing rewards to creators.

STEEM is its own blockchain. Therefore, it’s the native token. It’s used for keeping the network running and is therefore also a network token. Since its use is providing network features, it’s also a usage token, and because it provides a service (network), the legal status is deemed as a utility token.

Kin is both a token and an app inside an app ecosystem. Kin is used to pay for digital services inside several apps available on its network. In Germany, the Kin token could be regarded as a security and regulated as such.  

Kin is not just a cryptocurrency but has functionality and programmability contributing to the user experience. It’s a non-native token, and similar to STEEM, a network token doubling as a cryptocurrency as well. 

It’s also a network token and a usage token, but it differs from STEEM in that it can act as a cryptocurrency outside its system. Therefore, it can be regarded as a security token. 

The classification of tokens feels confusing to many, since they are relatively new and without a well-defined classification system. A good rule of thumb is this: any “crypto” can also be one or more types of “tokens.” 

Augur is a no-limit betting platform enabling gamblers to bet on sports, economics, world events, and more. Augur tokens are used to incentivize “Oracles” on the network who are essential to its function (Oracles bring off-chain data to the chain) as a decentralized prediction market. Oracles report events and receive a share of all network fees for their work. 

Since it was built on the Ethereum network, Augur is a non-native protocol token. Its primary use is to provide a reward for a needed function and is therefore a network token. And since the token is awarded as a result of work for the system, it’s a work token. An Augur token is not used outside the system, however, and so must be exchanged for external use. Thus, it’s also a utility token. 

Summary

The Token Classification Framework is a great system for defining cryptocurrencies or tokens. It requires users to think critically about their uses and identify their potential forms of regulation. 

As public sectors across the world dive into tokens, they should invest the time to define them according to their uses and subtypes rather than as part of the larger “crypto” buzzword. Yes, the presiding understanding of token classification remains limited, but the space is growing alongside the potential of blockchain. 

The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.

However, the presiding thought is that these digital representations will only have limited shelf lives. In a few years, the same “Apes” which collectors are paying hundreds of thousands for will wane in popularity and eventually be worth nothing. Billions of dollars may indeed be earned or lost.  

Yet many have asked if NFTs have practical applications beyond these two worlds. Are they helpful in real life? 

While it’s difficult to think of NFTs beyond their 2D or 3D images, they do have several practical applications. At their core, NFTs represent either digital or physical content or even intangible property. Let’s review some of these applications. 

Art

During World War II, much of Europe’s most prized masterpieces were taken by force. In other words, their chain of custody was lost. “Fakes” replaced some of these works, while some remained lost for decades or forever. 

With NFTs, the original artworks are tagged to their masters; they are tracked. Originality is ensured. One of the most traditional of settings, an auction house, has the most to gain from this new technology. 

Also, physical artworks can be converted into NFTs (such as with Banksy), and vice versa. Ownership of art is thus being fractionalized (if desired by the seller), so now you can own 1/10,000 of a Banksy as well.  

Gaming

Gaming uses NFTs with in-game items available for purchase, trade, and reward. NFTs can be used across platforms, allowing for longer shelf lives even if interest in a particular game decrease. This facilitates consistent revenue streams for brands or game developers. 

In-game trading becomes easier between players, increasing demand, and the values of NFTs themselves. With ownership and transaction tracking, players need no longer worry on the possibility of a scam, since the trading itself is near-instantaneous.

Real Estate

Real estate and NFTs function perfectly together. NFTs can be the digital representations of deeds that prove ownership. Title searches become obsolete since the NFT owners are the landowners, potentially cutting expenses for land transfers. Further, NFT’s timestamping capability tracks the changes in any property’s value, providing for simplified taxation. 

NFTs accelerate property transfers, through the option of selling without intermediaries who often charge excessive fees.  

The use of smart contracts could even facilitate decentralized rental services for various properties, automating payments and other administrative processes. 

Supply Chains

Many products throughout the world have issues identifying their origins, particularly in the food and beverage industry. Improper tracking facilitates the risk of E. coli.

Any product in theory could have an attached NFT indicating a specific identifier and accompanying information, which would be immutable and public. Supply chains are already making us of several applications. 

Medical Records

NFTs are capable of storing medical records, but they don’t have to compromise patient confidentiality or risk malicious manipulation by unqualified sources because, as they are blockchain-based, they are validated by multiple nodes first. 

Hospitals, insurance companies, and other medical organizations are exploring narrowly defined NFT use cases for improving operations, including patient verification and medical procedure recording. Confidentiality is ensured. 

For example, NFT Birth Certificates are issued to newborns at delivery so to provide a lifelong and effective way of identifying the child and their linked adults. This is the evolution of the paper birth certificate. 

Event, Travel, and Other Tickets

Tickets will be in NFT form, including entry and parking passes programmed to have uniquely assigned IDs and driving rights. This reduces the risks of counterfeiting, fraud, and identity theft. 

An owner will require only one token rather than multiple tickets or cards, or even cash. Transportation will be facilitated through longer journeys having multiple checkpoints. 

Academic Credentials

NFTs can indicate attendance records, degrees earned, and other important information, all of which must remain immutable. 

If utilized, NFTs streamline multiple administrative processes within academic institutions while championing the original essence of blockchain—permanent, verified, and immutable. Paper certificates would become only ceremonial. 

Voting

Since the rampant claims of voter fraud in the USA’s 2020 election, there have been multiple calls for required IDs to be shown before voting. However, mandating IDs risks disenfranchising those who lack copies of their identification or voter registration. 

Voting issues such as these can be solved by integrating NFTs. NFTs can provide identity and residence verification without physical documentation. They drastically reduce voter fraud as well. 

Product Authenticity

Buyers can now be confident that their purchases are authentic.  Because a blockchain permanently stores product information, confirming rarity and authenticity is always possible.

NFTs store information about harvesting, manufacturing, and fair trade. Yet this does not stop at the commercial level: several companies are using NFTs at the design and prototyping levels.  

Fake drugs and medicines can be prevented with NFT tracking. For example, you scan a bottle of a drug or supplement purchased online and verify its entire journey and use-by date. Sellers who claim legitimate products but are selling counterfeits will be exposed through NFT’s inherent transparency. 

Intellectual Property (IP)

Patents are well suited for NFTs because they allow users to provide proof of ownership of nearly anything, which is not possible with traditional IP tools such as trademarks and copyrights.  

The chain of history from the time of creation through every generation of ownership can be distinguished with timestamps. The immutable nature of a blockchain forever defines the original creator of an IP and makes infringement claims impossible. Any blockchain is a public ledger.  

Metaverse 

Nearly everything in the Metaverse will be in NFT form, including the virtual representation of individuals, or “avatars.” Products will be paid for with fungible tokens, but products or items themselves will be in NFT form. 

NFTs will effectively be tied to your avatar, as will its reputation. You could potentially sell or rent your avatar out. 

Summary

Blockchain is still young at 13 years old, and NFTs are younger still. They not only represent new explorations of art but all collectibles or things, not currency. 

Likely, we will see NFTs become integral parts of our lives given their incredible security, transparency, and utility. Their potential use cases include almost anything, from intellectual property to medicine to real estate. As the Metaverse expands, this will become more and more apparent. 

The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.