Types of tokens, by analogy

Analogies help to understand the similarities with existing things, but they may also be misleading by hiding the differences

We have already seen the main types of tokens, but as posts become more clarifying and less brief, it may be worth revisiting some of them. Today we revisit the types of tokens to explain them with analogies, which may be helpful to understand what is new and disruptive in the area, if anything. In the end, tokens are simply counting something, the question is what they count.1

1. Store of value tokens are often compared to commodities, however they are best compared to collectibles. In many cases store of value tokens have a limited edition, e.g. there will ever be at most 21 million Bitcoin, and in some cases there is no limit. Store of value tokens count the stakes on the corresponding blockchain, and the support provided to it.2
2. Platform tokens are used to pay the fees necessary to interact with a blockchain.3 This has a double purpose:

• Reward maintainers of the network, so far requiring mind-blowing amounts of energy and hardware due to limitations in its efficiency.
• Limit the transactions in the network, e.g. to avoid spamming transactions for profit.

1. Both banks and cloud (as a developer) have fees and prices to pay, platform tokens are not unlike that, with the difference that fees fluctuate, and the price of the token fluctuates as well, making the price twice dynamic. Platform tokens count the same as store of value tokens, and are also necessary to participate in the smart contracts of the platform.
2. Governance tokens provide voting rights and yield profit in some cases. They are very similar to stocks, they count the stakes of a person on a platform or protocol.4 There are two main differences:

• Transparency: the information in the blockchain is public, and so is voting, possibly using sock puppets.
• Less regulation: this may be a temporary issue as regulation lags behind technology.

1. Security tokens represent a tokenized version of an asset, e.g. stocks could be tokenized and traded in the blockchain, therefore they count how much of that asset is owned. Security tokens may also be considered as a voucher for some good, or a commodity like gold. In short, they record the ownership of the tokenized asset, much like banks would do in their databases with the usual difference of being transparent, pseudonymous, and decentralized.
2. Utility tokens are like a voucher for a service, the token is spent to use the service. The service does not need to adjust prices, as long as they are designated in tokens that may similarly fluctuate in price.

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Cross-posted from the Sigmoid newsletter