Crypto Academy Week 10 - Homework post for professor @Pelon53 - Topic: Tokens
The concept of "token" has been in existence long before the idea of cryptocurrencies came into play. Even in the early 1950s bets were made in casino houses using tokens (or chips as they call it). Every dollar you wish to bet with must be converted to chips first before you are allowed to sit on the betting table.
To collect your winnings, all you have to do is to present your chips to the collection counter. There are two things to note here: the first is how easily these tokens can be exchanged into cash and from cash back to the token. Another notable thing is the fact that it is the chip that gives you access to the gaming table, not necessarily the cash you came with.
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On the same illustration, if the same token which grants you access to the betting table, which can also be converted into real cash and back again, is taken outside the doors of the casino, it loses its value immediately. What this means is that its value is a function of a space or an environment.
The idea of token has been incorporated into the field of blockchain technology. Although the idea is basically the same, (with mode of creation differing), it is more easier for a layman to understand this token concept as related to the casino illustration, than when viewed from the area of cryptocurrency and blockchain technology.
For instance, both cryptocurrencies and virtual tokens are virtual and bunch of numbers, and unlike the real tokens which you can distinguish from the real money because of its shape and other physical attributes. Thus, it is not surprising that most person's (including me, laughs, but that was before the class), thinks that cryptocurrencies and tokens means the same thing.
Thank to Professor @pelon53 for today's lesson on Tokens, it has made both concepts clearer to me. After doing a little more study on my own, I made this post as a feedback to the assignment Professor @pelon53 gave at the end of the Week 10 class.
Before I discuss Security tokens, Utility tokens and Equity tokens, I will be introducing Token as it relates to cryptocurrencies and block chain.
INTRODUCTION TO VIRTUAL OR CRYPTO TOKEN
Tokens are units of value which are created by an organization and can be accepted by a specificied community. They don't have their own blockchain just like coins, rather they are built using an existing blockchain. Also, they don't have as much reach and acceptablity as cryptocurrencies have.
Each time a group of developers create a project on an exciting blockchain such as Bitcoin, Etherum, Binance, Tron e.t.c, tokens are created. For instance, Etherum is an independent cryptocurrency with it's own blockchain and a native token called Ether (ETH), it has other tokens which are built on its blockchain such as OmiseGo (OMG), 0x, and JNT. These token are dependent to the Etherum blockchain and if for any reason the blockchain ceases to function (though not possible), these tokens cease to exist. To further understand the concept, just think of a token as a subset of cryptocurrency.
There are names for tokens that exist on a blockchain. Tokens built on the Etherum blockchain are called ERC-20 token, those built on Binance are known as BEP-20 tokens, and tokens on the Tron blockchain are known as TRC-20 tokens.
Tokens are created for several reasons, some of which are:
During Initial Coin Offering (ICO), tokens are created and issued out to the public to help raise funds needed to develop the project. When a person buys these tokens, it makes them a shareholder in that cryptocurrency ecosystem.
With the aid of smart contracts in projects like Etherum, developers are able to create a native token which can be used in a given application for payment and in some application, a voting right.
An example of this can be seen in Decentraland, a 3D virtual world built using smart contract on the Ethereum blockchain. LANDs in Decentraland can be purchased using a fungible token known as MANA. Apart from acting as a payment for virtual assets in Decentraland, this ERC-20 token is also used as a governance token, and the more of it you have, the higher your influence in Decentraland's virtual government.
Tokens are created for several reasons, and based on their , they are classified into security tokens, equity tokens and utility tokens.
SECURITY TOKEN
Security tokens are stocks on the blockchain. These stocks are more like the shares of a company which investors buy. Just the same way holding a company share gives you a voting right in the company, companies issue voting right to their users who own security tokens through a blockchain platform.
These security tokens are actually proves of an investment on an external asset, and just like all investments, the net profit generated through these assets are shared among the investors based on how many security tokens they hold.
When an investor buys a security token, he can
- Save them in a wallet
- Use them as collateral, or
- Just sell them
It is worth noting that security token holders do not actually own any of the assets they invest in, rather they are only entitled to profits made through those assets.
Advantages of Security Tokens over traditional stock investments.
- Transparency:
One of the benefits of the blockchain technology is the transparency of all transactions. Thus, every security token holder knows how much the company made in profit and how much profit was paid back to each investor. - Easy accessibility:
Security tokens transaction are on the blockchain, and since a blockchain network is active every minute of the day, security token transaction can be done anytime, unlike the normal money market that operates only five days a week. - Quick payment of profit:
Security tokens has an advantage over traditional stock assets as the payment of its profit are faster and automatically made. In the traditional setting, an asset must first pass through banks and brokers before being transferred and cleared. Most times, these transactions take days to complete. - Lesser transaction cost:
Due to the fact that the use of security tokens cuts down the need for middlemen (bankers, brokers e.t.c), the transaction fee is considerably reduced. - Reachability:
Security tokens offers a reachability that no traditional asset can offer. Someone from Europe can own security tokens of a company in Asia or sell his tokens to another person in the world without even stepping out of his room.
source - Safety:
Through the use of smart contracts, every security token is highly secured and cannot be stolen. Traditional assets are not as secured as this. - Free from scams:
Security tokens are subjected to government supervision and regulations, therefore scammers can't launch a fake ICO just to swindle people of their money.
Example of Security token: SIAFUNDS
Siafunds are security tokens developed by Nebulous, Inc., which are used for sharing of revenue on the Sia network. Although it was developed in 2016, SEC designated it a security token in 2018.
Every storage related transaction on Sia attracts a 3.9% transaction fee. This 3.9% is shared among holders of Siafunds, each receiving a percentage based on how many Siafunds he/she holds.
Some of the services the Sia network renders to receive the 3.9% fee includes renting of bandwidth, renting of storage, collateral payed for hosting e.t.c
The total number of Siafunds in seculation is 10,000. Nebulous, Inc. owns 85% of the Siafunds in circulation, while the rest are held by Siafunds holders. The holders of Siafunds don't own the assets, rather they are entitled to the profits the asset generates.
UTILITY TOKEN
Utility tokens are created with the sole aim of helping a crypto company to raise funds for their project through initial coin offering (ICO). These utility tokens are designed to be an important tool in an ecosystem, and this need created gives the token value. During the ICO, these tokens are offered by the company and interested investors "fund" the project in return.
Just like security tokens, utility tokens gives the investor or user a voting right and allows him or her to participate in the activities carried out in the project's ecosystem. But unlike the security tokens which are subjected to government supervision and regulations, utility tokens are not. This is why scammers can launch fake ICO, and give out fake utility tokens just to swindle people of their hard earned money.
Advantages of Utility Tokens
a. Utility tokens help new crypto companies raise enough money they need to complete their project.
b. Considering the fact that utility tokens are sold at low price during ICOs, if the main intent of the initial coin offering was achieved at the end of the project, those that purchased utility tokens will make a lot of money from their investment.
Disadvantages of Utility Token
Over the years, we have seen scammers launch fake ICOs and swindle people of their money. This could have been avoided if utility tokens were regulated.
Even if the intention of the developers were genuine, if the project fails to achieve what's its expected of it, the tokens becomes worthless.
Example of Utility Token: GOLEM NETWORK TOKEN (GNT)
One of the few "successful" utility token is Golem Network Token (GNT). GNT was launched by The Golem Network which is a decentralized cloud computing network. This simply means that Golem Network runs a project which forms a peer-to-peer supercomputer network using several computers distributed all over the world. The network is powered by the users who earn and spend GNT token. The token is worth $1.25.
There are two types of users in the Golem Network: Requesters and Providers. Requesters pay providers so as to use any of their excess computational power which can either be RAM, CPU, GPU or even a disk space. The payments are made using GNT.
Golem was launch late 2016, right now it has become a decentralized alternative to IBM, Amazon, Microsoft, and other popular cloud computing giants.
The GNT is built on Etherum, and considered an ERC20 token. There are 1 billion GNTs which can be bought with both Fiat and cryptocurrencies.
EQUITY TOKENS
When an investors becomes an equity token holder, he actually owns a percentage in the company assets. How much he owns depends on how many equity tokens he holds. This makes it different from the security token in which investors are only entitled to the profits from the assets. Since each equity token holder is an owner of some fractions of the asset, he is giving a voting right in matters concerning the future of the asset.
Apart from being an owner of an asset, an equity holder is entitled to all the profits and dividends that the asset generates. Equity token is more like the traditional share sold by companies and banks. It only differs in the mode at which the data is recorded (Equity token data are stored in blockchain, while traditional share data are recorded on papers).
Equity tokens come in forms such as Tokenized Ventures, Options Contracts, Tokenized Real Estate e.t.c.
Example of Equity Token: RESOLUTE FUND
Resolute Fund is an example of a equity token. Developed by a real estate company known as Resolute Fund Inc., this equity token is regarded as the "first tokenized real estate fund" in the world. Apart from owning several real estates, the company offers loan on mortgages. These loans are also considered as an asset by the company.
When an investor buys a Resolute Fund, he owns a percentage of the company's asset, thus, he is entitled to a fraction of profit the real estate company makes. Since the token is under blockchain technology, his profit are automatically sent to him or her, at lower transaction cost.
Resolute funds was launched in the year 2018 and each of the token was sold for $1. Today, the value of the coin has appreciated to $11.54. Resolute Funds can be exchanged in the token market using cryptocurrencies such as ETH, LTC, BTC, XRP, e.t.c. It can also be acquired using Fiats e.g EUR, USD, YEN, and GBP.
In conclusion, blockchain and crypto technology offers everyone equal opportunity to move from a certain level of financial power to a higher level of financial power. Since the whole concept of cryptocurrency evolves daily, every investor must ensure he learns as much as possible within the limited time frame so as to be able to make this great transition with other enterprenuers. Among the many things he/she should know, a sound knowledge of the difference, pros and cons of security, utility and equity tokens are very vital.
Thank you so much Professor @pelon53, I enjoyed your lesson.
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Hola @whileponderin
Gracias por participar en la Academia Cripto de Steemit.
Excelente trabajo, felicidades.
Thank you Professor @imagen. An grateful.