Token Economies 101: The Difference Between Tokens and Coins

10 Sep 2018

Token Economies 101

Cryptocurrency today enjoys more positive news coverage than at any point since it was first invented, even with major media outlets like CNN, who once reported on the subject only when they could scrutinize or cast doubt on it. These financial news shows now gleefully draw in new viewers to their investing and trading segments by publicizing stories on the growing market capitalization of bitcoin, Litecoin, Ripple, and others. They spend hours highlighting the minute differences between them, speculating on future price, and stirring a ‘fear of missing out’ in the audience. In a time when many retail investors are involved in cryptocurrency speculation, it’s a logical way to boost any channel’s Nielsen rating.

The importance of cryptocoins to the current news cycle aside, those who delve deeper will discover that tokens are what the real community is abuzz over. Blockchain is much more than bitcoin at this stage, and though the evening news hasn’t yet caught up, true enthusiasts recognize the value of tokens for the technology’s sustainability. They incentivize meaningful participation from stakeholders, create a more impactful sense of ownership, and reward holders in ways that aren’t directly related to price.

The Difference Between Tokens and Coins

Bitcoin was the first blockchain concept that the world was introduced to. It aims to be a cash replacement--a digital version of the paper money that’s been in circulation for centuries. This is the quintessential ‘coin’ model, where focus lies squarely on the speed, cost, and ease of transacting in relation to the status quo. Litecoin and Ripple are also considered coins, as the only function they serve is to denominate value in an exchange of goods or services. Accordingly, their relative price in fiat money reflects their likelihood to become a popular, liquid form of money someday.

Tokens are also a medium of exchange, but with a far more focused purpose. Where coins compete in an arena with countless participants due to their largely singular ambition, tokens are a type of instrument that is useful in specific markets or even single businesses. They’re created in a more derivative fashion with an initial token sale (ITS) and built upon an existing blockchain that supports smart contracts like Ethereum. By funding the contract with the more liquid underlying coin, investors receive tokens from the business running the offering. These companies recognize that they can serve customers in a specific niche better by creating a tokenized model, and the tokens are how customers will participate in the service that will eventually be built with this newfound capital.

Tokens are a better way of circulating value between businesses and their customers, and ensure that each gets a better deal than if they had transacted in cash. This is because a well-crafted token ecosystem can incentivize customers to interact with a business in whatever ways are most valuable to them besides the purely financial aspect. In this kind of insular, self-sufficient cycle, it doesn’t matter that cash is absent, because both sides of the table get what they need.

Who Benefits from This System?

Companies using tokens accept them for their products and services, but require customers to use or earn them in a specific, curated way. For customers, the opportunity to get tokens that are spendable on their favorite services or products makes jumping through some hoops a great deal, especially because they often receive proportionately more for their participation. Both are the ultimate beneficiaries of such a system, yet it’s a delicate balance to strike. A tokenized business can easily program stipulations into their smart contracts that deliver them a significant amount of value, but if they don’t properly incentivize people to buy, hold, or use the tokens, the cycle is broken.

Therefore, it’s important to craft strong, yet concentrated value propositions for all participants. The most innovative companies are just now figuring out how to accomplish this, but for those who succeed, the results are impressive. Take retail marketing firm HotNow, for instance. Focusing on retail discounts that bring customers from the internet to brick and mortar businesses, HotNow is using this model to help these merchants get more tangible, transparent results from their online coupon promotions over inequitable solutions like Groupon. Businesses can reward those who complete preset missions like writing a review, posting about their products on social media, playing a mini-game, or other activities that aid in organic marketing efforts. HotNow also uses the blockchain ledger to track how people are earning and spending their earned tokens, and those with excellent creditworthiness can borrow tokens in bulk if they wish.

Another example of a shrewdly tokenized business model is Golem, a service that one can use to remotely connect with a supercomputer that can solve complicated problems in a fraction of the time that a normal PC would otherwise take. For work in cryptography, 3D design, and other computing fields, this represents a much less expensive way to conduct research. The network draws power from each of its participants’ computers in turn, to help serve their collective processing needs. Those who welcome Golem onto their PC are rewarded as in any tokenized business model, and can then turn around and spend the tokens in the system itself--to render an intricate virtual model, for example.

The Future of the Crypto Market

Cryptocurrencies are quickly being recognized for their vast potential outside of the financial industry, and though they might incorporate some financial motifs (like crowdfunding and investment), their primary purpose is to bring increased utility to business. While bitcoin still tries to break into the payment sector, and entice businesses with its dubious claims of faster transactions and lower overheads, tokens have already spread in the business world like wildfire. It’s now up to the tokenized businesses to demonstrate to hesitant onlookers that they can run leaner and meaner than the competition.

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