Tokens | Notion

This is a chapter from the book Token Economy (Third Edition) by Shermin Voshmgir. Paper & audio formats are available on Amazon and other bookstores. Find copyright information at the end of the page.

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Tokens are cryptographically secured digital certificates that are collectively managed by all nodes of a blockchain network or similar distributed ledger. They can be seen as the atomic unit of Web3. In their simplest form, they require just a few lines of code. Tokens are rights management tools that can represent anything from a store of value to a set of permissions in the physical, digital, and legal world. They are publicly verifiable and globally valid digital certificates. Their effect on the financial world might ultimately be similar to the effect the Internet had on the postal system.

Web3 tokens can represent more than just digital assets. They can be thought of as digital rights management tools that can represent the ownership of a physical asset, voting rights, management rights, or access rights such as a digital subscription or a membership.

Though the concept of tokens is not new, Web3 takes them to another level. Early societies used tokens as a way to represent value or grant access, with shells and beads likely being among the first tokenized objects. Over time, more sophisticated tokens were developed, such as coins, paper money, vouchers, stock certificates, casino chips, gift cards, entry or transfer tickets of any kind, and membership passes or ID cards—each serving a distinct purpose but sharing a core principle: representing various rights, identity, or values.

Any type of token always requires a level of anti-counterfeiting protection to maintain trust in the system they are part of. Before the emergence of blockchain networks, physical and digital tokens were managed by centralized authorities that provided such security mechanisms, regulating the creation, distribution, and verification of the respective token. Without these security measures, such as watermarks or specific materials, fraudsters could easily create copies of those tokens and undermine their value. For instance, a central bank manages the issuance of currency, including anti-counterfeiting mechanisms; event organizers issue tickets to concerts or performances, which include anti-counterfeiting measures. In digital systems, tokens can grant access or permissions, such as when a web browser uses a session token to maintain a user’s login status across a website. Similarly, QR codes can represent anything from boarding passes to access rights for various services. Such computer tokens, including their security and anti-counterfeiting mechanisms, are managed by Web2-based systems that rely on centrally controlled and private server infrastructure.

Web3 Tokens

Web3 tokens are publicly verifiable and globally valid digital certificates that transcend the boundaries of established certification authorities. Their validity is secured by the consensus mechanisms of the blockchain network upon which a token has been issued. In fact, consensus mechanisms of blockchain networks are designed to provide a native anti-counterfeiting mechanism for token transfers over the Internet. Bitcoin’s Proof-of-Work was the game-changing innovation because it introduced a native anti-counterfeiting mechanism for digital values over the Internet and subsequently paved the way for other blockchain networks and Web3 networks to emerge.

Web3 tokens do not manifest as digital files; instead, they appear as an entry in the ledger and are mapped to a blockchain address, which represents the blockchain identity of the token holder. They are only accessible with dedicated wallet software that communicates with the blockchain network and manages the public-private key pair related to the blockchain address, with which one can be authenticated as the owner or custodian of the token by all other network participants. If the token represents an asset, the owner can initiate the transfer of the token by signing with their private key. Similarly, if the token represents an access right to somebody else’s property, the owner of that token can initiate their access right by signing with their private key. The same applies to tokens that represent voting rights or management rights.

The first blockchain tokens were the native tokens of public and permissionless blockchain networks—also referred to as “protocol tokens.” In the very early days of crypto, each blockchain network only had one token, which served only one purpose, and that token was part of the incentive scheme of blockchain network participants. The Ethereum network introduced a much simpler form of issuing tokenized assets using smart contracts, making it particularly easy to issue tokens with a few lines of code without the need to create a dedicated blockchain network. The majority of tokens issued on the Ethereum network in the first years of its existence were fungible tokens. Over the years, more complex token standards emerged, with special properties and more complex attributes and behaviors attached, paving the way for a wide array of non-fungible tokens (NFTs). The first wave of NFT use cases emerged around the collectibles and art world—first in 2016 and then again in 2020/2021—which is why many people today still reduce the concept of NFTs to digital collectibles and digital art.

Properties of Tokens

Tokens can be designed with different properties that determine how they function and influence their potential use cases.

Embedded rights: Depending on their purpose and design, tokens can represent property rights, access rights, governance rights, or information rights. Property rights tokens allow ownership over assets—digital or physical—while access rights tokens grant the holder permissions to use a service or resource, such as a subscription or an event ticket. Governance tokens, on the other hand, offer voting rights or management rights, enabling holders to participate in the decision-making processes of a token system. Information rights grant access to certain data.
Fungibility: One of the primary properties of tokens is fungibility. Fungible tokens are interchangeable; one unit is equal in value to another unit of the same token. This property is essential for creating digital currencies and other assets that require liquidity and exchangeability. Examples include protocol-native tokens like Bitcoin or Ether, which serve as mediums of exchange. On the other hand, non-fungible tokens (NFTs) are unique and cannot be exchanged on a one-to-one basis, making them ideal for representing individualized assets such as artwork or real estate or tokens that represent identity-related information of people, organizations, and objects, like a tokenized driver's license or a tokenized product passport.
Transferability: Tokens can be designed to be transferable or non-transferable. Identity-bound tokens (also known as soul-bound tokens), such as diplomas or licenses tied to a person's identity, are non-transferable. In the case of asset tokens, transferability may also be restricted or only possible under specific conditions. While fungible tokens tend to be transferable in most cases, there are exceptions. Non-fungible tokens can be transferable or non-transferable, depending on the use case. A plane ticket might be transferable or non-transferable, depending on the type of ticket purchased. Asset tokens, such as tokenized art or tokenized car registration certificates, are usually transferable. However, their transferability could be restricted, either by the issuer or one of the downstream owners.
Minting event: The minting event refers to the creation process of tokens, which can occur in different ways. Some tokens are minted based on proof-of-participation or contribution to a network, incentivizing stakeholders in a token system to contribute value to that system and be rewarded with network tokens. Other tokens can be designed to be minted upon purchase, or they can be pre-minted at a specific point in time, ready to be distributed later when predefined conditions occur. The minting event is often tied to the broader economic or governance rules of the token system being created.
Expiry event: Tokens may or may not have an expiry event. Certain tokens are designed to expire—or be “burned”—after a specific action is completed, such as a one-time-use ticket for an event. Other tokens have no expiry date, allowing for indefinite transfer and circulation. Most transferable asset tokens—such as currencies, commodity tokens, or tokenized unique assets such as art tokens or real estate tokens—have no expiry date. They have a circular token flow and can only “sink” if a token holder loses their private key or if the underlying physical asset the token represents is destroyed. While currencies today usually do not have an expiry date or expiry event, this is a socioeconomic design choice. The lack of an expiry date may have historical reasons tied to the simple properties of early physical currency tokens such as gold and silver coins and other forms of commodity money. From today's perspective, money could be designed to come with an expiry date to prevent excessive hoarding and the long-term economic inequalities that often arise from it.
Stability mechanism or pricing strategy: Price stability questions are only relevant and desirable in the case of fungible tokens intended as a day-to-day medium of exchange. If price stability is needed, appropriate stability mechanisms need to be designed into the main network token (read more in chapter “Stable Tokens.”) Price stability mechanisms are not relevant in the case of non-fungible tokens for unique goods or services. In this case, pricing strategies are relevant, such as a fixed price strategy, a dynamic price strategy, one-time fees, or time-based fees.
Supply & distribution: If the token is designed as the primary currency of a blockchain network or another Web3 protocol, intended to incentivize network participation, questions of supply and distribution are important as they define the monetary policy of the network and its economic sustainability.