It seems to me that there are two conflicting views on the meaning and usefulness of tokens, and these views fundamentally differ as to the significance and purpose of a crypto asset. One of these views is conducive to long-term, organic growth and an efficient, healthy economy built on an international blockchain, and in my opinion the alternative perspective is short-term, misguided, and even parasitic on the efforts of others.

 

The “Money Token” Perspective

The negative, parasitic view is that a crypto token is something that is appropriate for speculation, day trading, and otherwise is similar to a stock or other investment where its value fluctuates and this creates an opportunity to make money by buying and selling tokens.

This view is quite common among many people following blockchains, including some very influential people who own a lot of tokens or who have significant interests in one or more blockchain related services or companies. Even among relatively casual dabblers, it’s easy to look at a chart which obviously resembles the charts we associate with stocks and carelessly infer that the two things are similar.

This view is parasitic because, among other reasons, it creates the possibility of a “pump and dump” token. Specifically, it is possible to create a new crypto token, generate some buzz about it so people will be convinced to purchase it, and then cash out of the token once the price has risen. This process creates nothing and is simply a deceptive theft using a new vehicle or a new set of tools to steal from people.

But even if we were to address the outright deceptive or malicious practices using decentralized technologies, the core problem remains where a crypto asset is being treated like a quick way to raise money or to get rich.

Raising money using tokens, for example, using a crowdsale or an ICO “initial crowdsale offering” is a potential game-changer for raising money for startups and businesses. But it is also stepping into a very dangerous realm where lots of money is changing hands with very unclear rights and obligations by both sides. Is this equity? Is it a loan? Are you pre-ordering a product? These are questions nobody has answered satisfactorily, and could create potentially fatal problems for a startup unless they can be nailed down.

It should come as no surprise that it is in fact possible to create a token which does in fact behave like a stock- such as the SEC’s decision to permit Overstock to issue actual stock using its blockchain platform. It seems to me that this is the eventual end of the road along the path of day trading and speculation- if these tokens are to be treated like stocks then it is likely that traditional regulations for stocks will be imported to them.

But this does not therefore mean that all crypto tokens are actually stocks, or that they should be treated like stocks, because the behavior of the token depends entirely on the system’s design. A trivial example would be a testnet token, which upon inspection may not appear any different from a genuine stock token, but because it runs in a test environment we should not imbue it with the same significance or consequence.

But even non-test tokens could obviously be very different from stocks, depending on how the network and the tokens are designed. We might imagine a blockchain system created for a videogame, intended to keep track of avatar items and gold, which would obviously not be a stock. Even if the game contained stocks of in-game fictional “companies” such as some blacksmith’s shop- actually that’s an interesting possibility, let’s put a pin in that one. A token meant for tracking in-game items like whether a player owns a particular magic sword is obviously not a stock, security, or otherwise a potentially dangerous token. What this database lets you do is track such information without a massive centralized database, and allowing direct peer-to-peer transactions without a middleman like a master server, potentially allowing two players to trade in-game items directly between their phones, among other possible use cases.

 

The “Service Value” Perspective

The blockchain is, ultimately, a new type of database. If your application takes advantage of this new type of database to do something that was not possible using a single central database, or if the use of a decentralized system makes the entire system more efficient, then that is obviously a compelling reason to use a blockchain. But the reason why the blockchain is contributing value is not because the token is itself valuable- it is because the service itself is useful and creates value to its users in some way.

In my opinion, in order for crypto to be taken seriously, we need to get very serious about ensuring that everyone is on the same page about how services provide value to users.

The reason why a decentralized service is valuable has nothing to do with tokens. Tokens are nothing more than a means to an end to facilitate the proper functioning of the system. The reason why a decentralized service is so useful is because it enables much more efficient transactions, while simultaneously allowing all parties to rely on the trust-free nature of the decentralized system.

For example, in the case of Bitcoin, making small transactions using existing payment systems like a credit card is extremely problematic. If you’ve ever been to a convenience store which required spending at least a certain amount to use a credit card, or else charging a fee, you have experienced first-hand the inefficiency of the credit card, and the need to pay multiple middlemen in order to facilitate that transaction. Bitcoin allows even absurdly tiny transactions to be handled continuously, and without trusted middlemen. A vendor does not need to hand over a fee plus a percentage to Visa or Mastercard, and that vendor can also make any number of very small transactions without causing them to lose money due to processing fees.

This functionality is what makes Bitcoin valuable, and it has nothing to do with the price of Bitcoin itself. Naturally the fact that this functionality is useful means that Bitcoin is desirable to have, increasing the value of the Bitcoin token. However, to get lost in the daily fluctuations of the Bitcoin token and treat it like a stock ticker, or worse still to start thinking of as-yet nonexistent companies like they are selling stocks, is to fundamentally misunderstand what is happening, and to do so in a very dangerous way.

It is easy to read the history of Bitcoin and become convinced that the meteoric rise of the price of Bitcoin is the most important aspect of crypto tokens. After all, everyone loves a rags-to-riches story, right? But the genuine reality of crypto is about efficiency and about trustless systems, and the side story of the value of the tokens is a distracting side story that may actually be harmful as such stories encourage speculation and attract the wrong sorts of get-rich-quick schemers and shady characters interested in deceiving people to make a quick buck.

 

On “Banana Coins”

Let’s make this contrast between these two perspectives more concrete, and less abstract. One major point of contention between these two perspectives on the significance of tokens is about the types of tokens that should be created, and what the rules and network behaviors should be which govern those tokens.

The “money token” perspective would assert that a token is valuable, and that therefore creating a token for every possibly type of value or representative thing is a good idea. Creating a “banana coin” which represents bananas, and an “orange coin” which represents oranges, for example, where a banana coin might capture the value of bananas, while an orange coin represents the value of oranges.

However this seems to me to be a shallow appeal to a self-serving, exploitative approach which gives as much license as possible to create as many coins as can be imagined, even when it makes absolutely no sense to do so. In other words, this logic is an attempt to veil an otherwise apparent intent to sell worthless tokens for actual money.

It is my view, and the “service value” perspective, that it does not make sense to make countless types of crypto tokens for every conceivable type of value. This does not “create value” – it confuses real value with creating a whole lot of objects which are merely used to measure value, while contributing nothing of substance.

In fact it only makes sense to create a new token if your network rules must differ from some other type of network. For any conceivable type of crypto token where you are representing anything value-like or money-like, it honestly makes more sense for everyone to agree on a single common token such as Bitcoin. There is absolutely no purpose in creating a “Banana Coin” when you are functionally just representing something with properties similar to money. You can easily represent a quantity of bananas based on a measure of value and the price- such as using US dollars- $20 worth of bananas at $0.50 per pound of bananas. This is how commerce has been done for centuries, including precise measurements of large quantities of endless varieties of commodities. They all reduce to a universal “value” and a price for that thing.

However not all tokens will use a universal, cash-like measure of value. Perhaps a token is redeemable for a very specific item, or for a very specific software service. This token is not anything like cash, rather it is more like a claim voucher which is only redeemable for a very specific good or service. This will require a fundamentally different set of rules than just using Bitcoin.

Or perhaps instead of making a distributed ledger, you want to have distributed computation. This is what Ethereum is doing, and this is also a very different architecture from representing a cash-like value. The Ethereum network together comprises an enormous computer running in sync, with anyone in the world able to pay gas in order to perform computations using that computer. The price of Ether is very important to the proper functioning of the network, since there is a finite amount of compute power available to it. But it would be a mistake to conceptualize Ether as if it were a traditional stock representing equity in a company, or to believe its primary purpose were to buy and sell it in order to make money.

There are any number of possible applications, from distributed disk storage to messaging to content distribution, and in each case we must ask the question- under what rules does this network operate? Does it make sense that this network’s rules are functionally different from something like Bitcoin? How does the design of the token system facilitate the service’s intended operation?

 

In brief:

A new crypto token should be created if and only if the intended purpose and/or design of the token requires a new set of rules in order to do its job.

If someone is trying to sell you a crypto token that is functionally identical to an existing crypto token, I would consider it likely they are attempting to exploit people who buy into that token.

In the blockchain space today, a great many tokens are being created that do not need to be created at all. Many of them could use Bitcoin or Ethereum, but do not want to because those tokens cost money, whereas creating one out of thin air costs nothing, and every token sold is a windfall. Even if a service is legitimate, we need to ask some very hard questions about this practice.

 

Conclusion

The reason why this “stock” or “money” narrative is so difficult for people to escape is because the first crypto token experienced such a miraculous ascendancy from being worth tiny fractions of pennies, to today being worth hundreds of dollars. I have no doubt that some people became very, very rich as a result.

It is currently the Wild West out in cyberspace with crypto, and after the pioneering efforts of many Bitcoin and Ethereum firms, the second string of scammers and vultures have descended. These come in many guises, but they frequently want to sell you their tokens. And many of them will talk of “creating value” by creating a token, or will offer grandiose promises of how much the value of their token is going to rise in value. Seriously, let’s stop this.

We as an emerging industry must solve this problem, and immediately, in order to become a mature and reputable space for people to conduct their affairs. It is not acceptable for us to languish in the blockchain equivalent of a ’90s internet, where the general perception was that eBay was a scam website populated by fraudsters, and that internet commerce was inherently insecure and untrustworthy.

The potential of blockchains is for us to create such a powerful set of consumer protections that they can be provably beyond question. It will take time and experimentation to arrive at the mathematically perfect methodology and industry standard smart contract systems which have a track record of being bulletproof. But every errant step backwards taken in the opposite direction now, is one we are going to have to battle entrenched special interests over, and bleed for every inch to recover later.

Let’s get it right the first time.