What is a token system or token economy

What is a token system or token economy

By bit.team

The term “token economy” is reflected in the literature in two ways. On the one hand, it describes a procedure from behavioral therapy: here a token is used to change behavior. In a free economy, these tokens are exchanged between market participants in the form of ownership rights, means of payment or rights of use. Let’s talk about tokens in the latter context, as well as their potential and real impact in the economic cycle.

But let’s start with a parable. Neither the form, nor the material, nor the presented value of the token are specified. Railway workers made this principle their know-how in the early years of its existence: at that time there were still many single-track lines, there were no traffic signals or even signal booths. Instead, the coin defined a clear section of the route between the two stations. Before leaving, the driver simply took the corresponding token and returned it at the next station.

The effect is as simple as it is safe: only a train with a token could travel along the route to prevent collisions. The simplicity of the function is still relevant today. A representation for an exactly specified value can only exist once, and it can only be executed by one person.

Token systems in Business

In business, it is not uncommon for an asset exchange to require a reliable and independent third party, abbreviated TTP (Trusted Third Party). However, this workaround has significant drawbacks, such as higher cost, longer processing time and, ultimately, disruption of the system. Thus, innovative concepts revolve around higher automation and decentralization of these TTP. The blockchain with probably the most famous token called Bitcoin offers a promising concept.

Bitcoin appeared in 2009 as the first publicly traded cryptocurrency based on distributed ledger technology. Bitcoin’s goal is to make the digital currency accessible to everyone.

Unlike fiat currency, Bitcoin is managed without intermediaries or central authorities such as banks, and at the same time prevents the main problem of each cryptocurrency – double spending.

DLT ensures that transactions are debited offline on the network, and that transactions between parties cannot be executed twice. It doesn’t matter if the parties know each other. Each transaction process is decentralized and is mainly evaluated for correctness on the network, and then stored in such a way that all parties involved can understand it.

Thus, the distributed registry technology also automates the integrity of the network and the payment information contained therein. This principle allows everyone to participate, without registration or the need to undergo a thorough identity check.

Thus, DLT competes to a certain extent with traditional financial institutions that were previously privileged in relation to these basic processes.

According to Coinmarketrate.com currently, there are about 13 thousand cryptocurrencies that use the properties of distributed registry technology. However, apart from Bitcoin (El Salvador), none of them is officially recognized as a currency by the state or the monetary union (and, consequently, the central bank). Therefore, they are not considered a universal means of payment, since the structure and transparency of these cryptocurrencies are too different. The biggest drawback is the high volatility of cryptocurrencies, which affects the stability of their value.

And so, returning to the functionality of digital tokens, they can be divided into four sectors:

  1. Tokens as digital equivalents of an asset;
  2. Token as an authorization key in networks;
  3. Tokens as service equivalents;
  4. Token for authentication.

Ultimately, with the help of a token, you can determine the rights and obligations, and at the same time legitimize yourself as the rightful owner. How? Using non-interchangeable tokens (NFT).

Interchangeability means that you can exchange a bill of 1,000 rubles for another bill of the same denomination. Both tokens represent the same thing, they are interchangeable.

NFT, on the contrary, is called non-interchangeable, and recently it has experienced rapid and loud growth, bringing 769 billion to the crypto-capitalization piggy bank. Jokes, exclusive video clips from movies, or rights to music or works of art can now be associated with this type of token and are thus protected by law. An example of this is the Decimal Chain blockchain project, as well as in confirming the authenticity of documentation.

The use case of the NFT token

The preliminary stages of today’s NFTs were certainly CryptoKitties. In October 2017, the Canadian company Dapper Labs released a trial version. Virtual cats could mate and, accordingly, inherit their 256-bit DNA. Attributes ranged from the color of the eyes to the shape of the mouth. The digital cat was sold for $117,000 in December of the same year.

Since then, the world has been overwhelmed by the emergence of various types of digital collectibles. The NBA digitized collectible cards with the most beautiful “dunks” of its athletes, Netflix auctioned unique scenes from films of its own production, and musicians such as Eminem and the Kings of Leon published their digital works of art.

NFT became known to the general public with the auction of the artwork “Everday: The first 500 days». The work of the artist Bipla was sold at auction at the famous auction house Christie’s in London for a whopping $69 million.

All this clearly proves the security of a decentralized network from hacker attacks or manipulation. After all, both artists and buyers believe that the ownership structure is reliably and consistently documented.

Tokens of central banks

The central banks of the world are cautiously approaching the topic of the central bank’s digital currency (CBDC) in order to counteract the spread of private currencies. At the same time, the first available CBDC promises the issuing central bank and the associated country significant benefits of the mover. This creates a conflict: implementation decisions must be carefully thought out, at the same time there is a race to become the first central bank to bring a central bank digital currency to the market.

Unlike cryptocurrencies (they should by no means be confused), the Central Bank’s digital currency (CBDC) is the central bank’s digital money, which has the same exchange properties as well—known paper money. However, depending on the model, they may differ significantly from paper money.

This digital money is regulated, and does not behave like cryptocurrencies based on distributed ledger technology (DLT).

Thanks to CBDC, the cost of receiving money is reduced, and the payment processes between machines initiated using so-called smart contracts are legally secure, and can be divided into the smallest units of value (the keyword “micropayments”).

Money laundering becomes almost impossible. Centralized IT solutions already allow for transfers. However, a standardized ecosystem based on DLT offers many more advantages.

Summing up

The acquisition of external capital in the financial market continues to this day. Whether we want it or not, this process has already been launched. Tokenization of everything and everything is already in full swing. Time will tell which tokens will survive in this digital transformation.