Know Your Tokens: Not All Crypto Assets Are Created Equal

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What we understand by the term “token” is actually best defined as the balance of some kind of account.

But, perhaps most importantly, it’s a balance that can really mean anything its founder wants it to mean. To date, tokens have been made to represent a user’s reputation within a system (augur), a deposit in US dollars (tether), the quantity of files that are saved in it (filecoin) and the balance in some internal currency system (bitcoin).

Because of this, I sometimes argue that tokens don’t even exist – mostly, because I want to draw attention to the fact that they always have a very specific meaning.

If we want an analogy, tokens can turn everything that we’re used to seeing in paper form – including shares, and money and promissory notes – digital. But the terms we will use for these things will remain unchanged (shares will still be shares). The fact that crypto assets are stored in a decentralized accounting system, or require digital signatures, doesn’t change their meaning or value.

As such, the problem that is emerging isn’t with the actual terms themselves, but that people have begun to assign attributes to tokens that they can’t possibly have.

There are people who claim that cryptocurrency tokens are something entirely new – and that projects that issue tokens can become amazingly transformed.

Sadly, that’s not the reality.

Tokens and tokens

In computer terminology, the term “token” has long meant one of two things: a gadget that can authorize a user (such as a dongle or a special thumb drive), or a fixed array of symbols that identify a user (such as an API key).

In both situations, tokens can pass between different owners. So, how are cryptocurrencies different from the tokens we know?

Generally, the term “crypto asset” means one of three different things:

  • A cryptocurrency with decentralized issuance and transactions.
  • A digital asset, issued into a decentralized system, and secured by either someone or something. This version can be split into two further subdivisions: either the accounting system isn’t trusted; or the issuer isn’t trusted.
  • Something that’s both issued and validated by the same organization, yet not backed-up by anything.

We can sum up all of the above possibilities in one simple diagram:

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