TOKENS – What is it and where do they come from

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TOKENS – What is it and where do they come from?

Few people have not heard about bitcoin – the very mega-promoted crypto currency. And now, imagine that tokens are times less popular tokens, which are also cryptocurrency. Here the difference is almost the same as that of the dollar and the Belarusian ruble, where both examples are currencies, but issued by a different issuer. There will be clever people who will object to this and state that this is not the same, because bitcoin is a crypto currency, whereas a token is a digital asset. Yes, yes, yes, but not quite yes .. Crypto currency is the same and is a digital asset, and statements that bitcoin and token are not the same, in general, will not be entirely true.

Where do tokens come from?

The companies issue tokens to attract investments for their development. The process of releasing tokens is called ICO (Initial Coin Offering or “initial coin offer / initial coin placement”). For a better understanding, consider the following example with the already mentioned bitcoin, which comes in the form of reward to the miners. Those, in turn, use computers to perform complex calculations and generate the crypto currency itself through mathematical protocols. The type of cryptocurrency will depend on the type of protocol used. Now let’s imagine that some company created its own protocol, then translates its technique there and starts generating its own crypto currency – that is, those tokens. Therefore, the blockade and ICO are inextricably linked, since the latter is a chain of computers – an analogy of the blockbuster.

Types of tokens

There is no definite classification of tokens at the moment. But still they can be divided by functions, according to the wishes and needs of the company itself, which produces ICO, namely:

– Tokens “tokens” – are the usual speculative currency. The investor buys these tokens with the prospect of earning on the growth of their prices. When the price increases the investor rushes to sell the purchased tokens more expensively and collect the maximum benefit.
– Tokens “shares” – often analogue to traditional shares. Here the company issuer gives the opportunity to their owners to receive income in the form of dividends. In addition, as in the case of stocks, the owner of these tokens can also influence the management decisions of the company itself.
– Tokens “bonds” – they are very similar to the previous ones, but with a small difference. The company that issues such tokens, takes the amounts from their sales as loans. That is, the issuer undertakes to pay interest income on the value of issued tokens to their owners.

However, the US Securities and Exchange Commission (SEC) and the Swiss Financial Market Supervision Service (FINMA) are trying to classify the tokens, which are divided into the following groups:

– “Security tokens according to the SEC” / “Asset tokens according to FINMA” – they give the right to receive basic assets, dividends and interest payments. That is, with economic functionality similar to shares, bonds or derivatives.
– “Service tokens” (Utility tokens according to the SEC and FINMA) – provide access to goods and / or services that the issuer company plans to launch in the future under the project. Moreover, owners of service tokens may also be eligible for a discount / premium access to these products and / or project services.
– “Real Cryptocurrencies according to the SEC” or “payment tokens” (Payment tokens according to FINMA) – are often considered as a means of settlement – a currency instrument and have their own block. Often they are not associated with any other projects and do not have any other functions. By and large, this cryptocurrency should become an analogy to money and gold. It should give its owner the right to buy and sell, as well as perform other financial transactions, which in a similar way gives a cryptocurrency.

Where to get the tokens?

In most cases, companies that simulate their own tokens place their respective purses on their own websites. Everyone can send crypto currency and in this way to get tokens. Also you can find sites with ICO calendars about sales of tokens – for example here: tokenmarket.net/ico-calendar wiserico.com/ www.icoalert.com/ www.investing.com/crypto/ico-calendar and many others).
More tokens can be easily and quickly purchased at crypto-exchange exchanges, for example, poloniex.com/ exmo.me/ or bittrex.com/, etc. To begin with, you will need to register and make a contribution to the trading account you open, a certain amount of cryptonet. After that you can get the necessary tokens.

“General Risk Warning: Binary options trading carry a high level of risk and can result in the loss of all your funds.”

What Are Security Tokens? [The Most Comprehensive Guide]

Go on YouTube right now and search for Security Tokens.

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  • Why are Security Tokens the future?
  • Are Security Tokens the next big thing?

So, it seems like there is a lot of hype behind security tokens nowadays. In this guide, we are going to learn everything about security tokens and see if they are worth your time or not.

Firstly, let’s briefly define security tokens. In a traditional sense, securities can represent an ownership position in a publicly-traded corporation, a creditor relationship with a governmental body/corporation, or rights to ownership as represented by an option. A security token is a tokenized, digital form of these traditional securities. Before we go any deeper, let’s revisit the basics.

What are Tokens?

It can be a little complicated to pinpoint on an exact definition of a “token”. To give you a very wide, non-generalized definition, a token is a representation of something in its particular ecosystem. It could value, stake, voting right, or anything. A token is not limited to one particular role; it can fulfill a lot of roles in its native ecosystem.

Before we go any further, however, we must make one more difference clear. The difference between a cryptocurrency coin and a token.

A cryptocurrency coin, like Bitcoin, Bitcoin Cash, Ethereum, etc. can be is independent of a platform. They can be used as a form of currency outside their native environment. Basically, these are the “cryptocurrencies” that we are all familiar with.

However, on the other hand, OmiseGO, Golem, etc. are examples of tokens which exist on a particular platform, in this case, Ethereum.

A token, represent an asset or utility that a company has and they usually give it away to their investors during a public sale called ICO (Initial Coin Offering).’

What Are ICOs?

ICOs or Initial Coin Offerings are basically crowd sales, the cryptocurrency version of crowdfunding. The ICOs have been truly revolutionary and have managed to accomplish amazing tasks:

  • They have provided the simplest path by which DAPP developers can get the required funding for their project.
  • Anyone can become invested in a project they are interested in by purchasing the tokens of that particular DAPP and become a part of the project themselves. (We are talking about Work Tokens here).

So, how does an ICO work?

Firstly, the developer issues a limited amount of tokens. By keeping a limited amount of tokens they are ensuring that the tokens itself have a value and the ICO has a goal to aim for. The tokens can either have a static pre-determined price or it may increase or decrease depending on how the crowd sale is going.

The transaction is a pretty simple one. If someone wants to buy the tokens they send a particular amount of ether to the crowd-sale address. When the contract acknowledges that this transaction is done, they receive their corresponding amount of tokens. Since everything on Ethereum is decentralized, an ICO is considered a success if it is properly well-distributed and a majority of its chunk is not owned by one entity.

The recently concluded EOS ICO which raised a whopping 4 billion dollars in a year is till date the biggest ICO ever.

Also, as TechCrunch points out , ICOs delivered at least 3.5x more capital to blockchain startups than Venture Capitals since 2020

How Does a Token Gain Value?

So, before we continue and classify our tokens, let’s look at what functions a token can serve in order to gain value.

As William Mougayar points out in his Medium article , there are three tenets to token value and they are:

These three are locked up in a triangle and they look like this:

Each token role has its own set of features and purpose which are detailed in the following table:

Let’s examine each of the roles that a token can take up:

By taking possession of a particular token, the holder gets a certain amount of rights within the ecosystem. Eg. by having DAO coins in your possession, you could have had voting rights inside the DAO to decide which projects get funding and which don’t.

Value Exchange

The tokens create an internal economic system within the confines of the project itself. The tokens can help the buyers and sellers trade value within the ecosystem. This helps people gain rewards upon completion of particular tasks. This creation and maintenance of individual, internal economies are one of the most important tasks of Tokens.

It can also act as a toll gateway in order for you to use certain functionalities of a particular system. Eg. in Golem, you need to have GNT (golem tokens) to gain access to the benefits of the Golem supercomputer.

Function

The token can also enable the holders to enrich the user experience inside the confines of the particular environment. Eg. In Brave (a web browser), holders of BAT (tokens used in Brave) will get the rights to enrich customer experience by using their tokens to add advertisements or other attention based services on the Brave platform.

Currency

Can be used as a store of value which can be used to conduct transactions both inside and outside the given ecosystem.

Earnings

Helps in the equitable distribution of profits or other related financial benefits among investors in a particular project.

So, how does this all help in token valuation?

In order to become more valuable, a token must fulfill more than one of these properties. In fact, more properties that a token can have, higher its valuation

Alright, so now we know what a token is, how a company distributes token and where a token can gain value from.

Before we go any further, it is important to know what the Howey test is.

What is a security token: The Howey Test

In 1946, the Supreme Court handled a monumental case. The case was SEC vs Howey which would lay down the foundation for the, now infamous Howey Test. The case was about establishing a test of whether a particular arrangement involves an investment contract or not.

To keep a long story short, two Florida-based corporate defendants offered real estate contracts for tracts of land with citrus groves. The defendants offered buyers the option of leasing any purchased land back to the defendants, who would then tend to the land, and harvest, pool, and market the citrus. As most of the buyers were not farmers and did not have the agricultural expertise, they were happy to lease the land back to the defendants.

However, this was deemed illegal by the U.S. Securities and Exchange Commission (SEC) and the defendants were promptly sued.

According to the SEC, the defendants broke the law by not filing a securities registration statement. Upon investigating the defendant’s leaseback and finding that it was indeed a security, the Supreme Court made a true landmark decision.

They developed a test which will be used to determine whether a certain transaction is an investment contract or not. If it is, then it will be subject to securities registration requirement.

The said transaction will be called an investment contract if it fulfills the following criteria:

  • It is an investment of money
  • The investment is in a common enterprise
  • There is an expectation of profit from the work of the promoters or the third party.

The term “common enterprise” is open to interpretation. However, many federal courts have defined a common enterprise as a horizontal enterprise where the investors pool in their money and assets to invest in a project.

Even though the original Howey Tests used the term “money”, later cases expanded that to include other investments and assets other than money.

Plus, there is another important thing to consider while determining securities. The profits that come from the investment, is it in the investor’s control or is it completely out of it? If it is not in the investor’s control, then the asset has usually declared a security.

So, how is this relevant for ICO and tokens? If the token meets all the three aforementioned criteria, then it is regarded as a security.

All these three elements have to be met for a coin to classify as security.

Other Alternative Tests

Turns out that the Howey Test is not the only test that courts can use to find out whether a given investment is a security or not.

In 1990, the Supreme Court developed a family resemblance test which provided a way for contract creators to show that their contract has a “family resemblance” to other investments and hence cannot be called securities.

Certain states have their own securities registration requirements which are sometimes called “Blue Sky” laws.

“The first blue sky law was enacted in Kansas in 1911 at the urging of its banking commissioner, Joseph Norman Dolley, and served as a model for similar statutes in other states. Between 1911 and 1933, 47 states adopted blue-sky statutes (Nevada was the lone holdout). Today, the blue sky laws of 40 of the 50 states are patterned after the Uniform Securities Act of 1956. Historically, the federal securities laws and the state blue sky laws complemented and often duplicated one another.”

The DAO and SEC

The Howey Test and securities have become a source of intense debate in the crypto-community after the DAO tokens failed to pass the Howey Test and were deemed securities by the SEC.

This article by Ash Bennington for Coindesk, breaks down why the Dao was deemed a security in the form of a tale:

Not so long ago, a group of developers started a DAO.

The DAO developers said:

There are all these decentralized projects and there’s no way for them to get funding – because they need money to make money.”

Tell you what. We’re going to write code and sell a token and, in exchange, people who buy the token will get whatever profits are made from those projects.

We’ll work the code. They’ll pick the projects. The projects will flourish and everyone will profit.

The SEC said: “That’s a security.”

The DAO developers said: “No, no. That’s just selling tokens.”

Ultimately, the SEC said: “That’s a security” – because of the application of the Howey Test: There was an investment of money. And a common enterprise. With the expectation of profit, primarily from the efforts of others.”

So, why was this investigation and ruling done in the first place?

Well, it was because of the infamous DAO hack. We have covered this in detail before, but just to give you an overview :

  • There was a flaw in the Dao smart contract
  • The hacker exploited that flaw to execute a re-entrancy attack.
  • Over $!50 million worth of ether was siphoned away.

Because a lot of people invested and got back nothing in return, the SEC intervened to “protect” the interest of the investors and deemed the tokens a security.

As SEC CEO Jay Clayton puts it , “The SEC is studying the effects of the distributed ledger and other innovative technologies and encourages market participants to engage with us. We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”

This decision was met with mixed reception in the Crypto community:

Brad Garlinghouse, Ripple Ceo, said,

“Regulators aren’t going away – and shouldn’t. For generations, they have protected from fraud (some is happening w/ the ICO market).”

Roger Ver, Bitcoin.com founder, however, disagreed with the decision,

“Call this what it is: A bunch of strangers in a far-off land threatening peaceful people all over the world with violence if they don’t obey.”

Ok, so till now we know what tokens are and what the Howey Testis. So, now let’s get into the two major classifications of tokens.

Types of Tokens

The SEC and FINMA have broken down tokens into two broad categories:

  • Utility Tokens
  • Security Tokens

Utility Tokens

Because most of the ICOs are investment opportunities in the company itself, most tokens qualify as securities. However, if the token doesn’t qualify according to the Howey test, then it classifies as utility tokens. These tokens simply provide users with a product and/or service. Think of them like gateway tokens.

As Jeremy Epstein, the CEO of Never Stop Marketing, explains, Utility tokens can:

  • Give holders a right to use the network
  • Give holders a right to take advantage of the network by voting

Since there is an upper cap on the maximum token availability, the value of the tokens may go up because of the supply-demand equation.

Security Tokens Crypto

Finally, we come to security tokens.

So what exactly are they?

A crypto token that passes the Howey Test is deemed a security token. These usually derive their value from an external, tradable asset. Because the tokens are deemed a security, they are subject to federal securities and regulations. If the ICO doesn’t follow the regulations, then they could be subject to penalties.

However, if all the regulations are properly met, then these tokens have immensely powerful use-cases.

What Regulations Are Security Tokens Subjected to?

Anthony Pompliano does an admirable job of explaining the kind of regulations that security tokens will be subjected to in this article.

According to him, because Security Tokens are subject to federal security regulations, they are compliant from the first day itself. So, in USA, security tokens need to follow these regulations:

  • Regulation D
  • Regulation A+
  • Regulation S

Regulation D

Regulation D will allow a particular offering to avoid being registered by the SEC provided “Form D” has been filled by the creators after the securities have been sold. The individual who is offering this security may solicit offerings from investors in compliance with Section 506C.

So what does Section 506C require?

It requires a verification that the investors are indeed accredited and the information which has been providing during the solicitation is “free from false or misleading statements.

Regulation A+

This exemption will allow the creator to offer SEC-approved security to non-accredited investors through a general solicitation for up to $50 million in investment.

In order for the requirement to register the security, the issuance of Regulation A+ can take a lot more time compared to other options. For the same reason, Regulation A+ issuance will be more expensive than any other option.

Regulation S

This happens when a security offering is executed in a country apart from the US and is therefore not subjected to the registration requirement under section 5 of the 1993 Act. The creators are still required to follow the security regulations of the country where they are supposed to be executed.

NOTE: As Anthony Pompliano notes in his article, the above summaries are merely his interpretation. They should not be construed as legal or investment advice and you should consult a lawyer for any and all questions you have.

Why are Security Tokens Important?

Since the assets which are represented by the security tokens already exist in the “real world”, they act like a bridge between legacy finance and the blockchain world. So what are the exact changes that security tokens are bringing along with them?

#1 Bringing Credibility Back

As of right now, the ICO space is a little dicey, to say the least. There is a real deficit of accountability in the space because of a lack of regulation for utility tokens. In order for the ICO space to regain some credibility, it should make sense to somehow amalgamate the crypto space and the legacy finance space together.

#2 Improving Traditional Finance

Traditional financial transactions can be a little expensive because of all the fees associated with the middlemen like bankers. Security tokens remove the need for middlemen which reduces fees. In the future, smart contracts may reduce the complexity, costs, and paper works.

#3 Speeding up Execution

Traditional financial institutions have a lot of middlemen involved which simply increases the execution time. By removing these middlemen, securities allow for faster execution time for the successful issuance of security tokens. Because of this increased speed, the security tokens are bound to become attractive investments.

#4 Exposure to Free Market

Investment transactions today are extremely localized.

What do we mean by that?

Chinese investors find it extremely hard to invest in private US companies and vice-versa. So, how are security tokens going to help here?

Well, by using security tokens, creators can market their deals to anyone on the internet. This exposure to the free market helps in increasing asset valuation. Also, this increased exposure leads to….

#5 Huge Number of Investors

Since creators can now present their deals to anyone on the internet, the investor base increases exponentially.

This is another huge incentive for creators.

#6 Reducing Lawyer Service

In the future, there security token projects will use smart contracts which will automate service provider functions through software. These functions are currently provided by players such as lawyers which add on to the potential middlemen involved in the project.

#7 Lack of Institution Manipulation

Because the number of middlemen decreases drastically, the chances of corruption and manipulation by financial institutions decrease drastically and may even be removed from the investment process.

#8 Easier Liquidation

Secondary trading on security tokens will be made simple through licensed security token trading platforms and it will be extremely easy for investors to liquidate security tokens.

Having said that, not everything is sunshine and rainbows, there are some disadvantages of security tokens.

Do Security Tokens have a Weakness?

The removal of the middlemen is usually seen as a huge advantage. However, you can’t have your cake and eat it as well. There are some disadvantages which will invariably come along with security tokens. Removal of middlemen leads to the shifting of responsibilities onto the buyer or the seller in the transaction.

These middlemen i.e. financial institutions serve a lot of important functions in the ecosystem such deal underwriting, preparation of marketing materials, solicitation of investor interest, insurance of high levels of security, and compliance regulation.

Many critics feel that the creators won’t be able to successfully execute these functions without traditional financial institutions. We need to wait and watch if these fears have any basis or not.

Conclusion: Security Tokens?

The crypto community breath a sigh of relief when SEC has ruled Bitcoin and Ethereum to not be securities. As of right now, security tokens have a far less share of the market as compared to utility tokens, however, security tokens are something which can become huge in 2020 and needs to be embraced by everyone soon. It is believed that tons of capital is going to flow from Wall Street to security tokens instead of utility tokens.

This shift is happening because security tokens are considered to be safer because of the strict regulations.

SPICE Venture Capital founder Carlos Domingo expertly summarized his thoughts of the potential size of the security token market:

“It’s inevitable that security tokens will transform equity just as bitcoin has transformed currency, because they afford the owner a direct, liquid economic interest and the expedited delivery of proceeds. Every type of ownership can be tokenized, which is a massive multi-trillion dollar addressable market.”

What is An Ethereum Token: The Ultimate Beginner’s Guide

To a beginner, the entire concept of Ethereum and Ethereum token can get very confusing very fast.

The idea that Ethereum not only has its own currency (Ether) but also has tokens on top of that which can act as currency themselves, can be a little mind-boggling. Before we even begin understanding what Ethereum tokens are all about, it’s important to grasp some basic concepts. If you would like an intensive walkthrough of Ethereum please check out our dedicated blockchain courses on ethereum.

The entire Ethereum network is a giant mass of nodes (computers) connected to one anothe r. In fact, the entire network can be visualized as a single entity called the “ Ethereum Virtual Machine ” or EVM for sh ort. All the transactions that have happened and will ever happen in this network are automatically updated and recorded in an open and distributed ledger. So what is the advantage of this? Before we explain that it is important to know what a “smart contract” is.

Smart Contracts

Smart contracts are how things get done in the Ethereum ecosystem. When someone wants to get a particular task done in Ethereum they initiate a smart contract with one or more people. S mart contracts are a series of instructions, written using the programming language “ solidity ”, which work on the basis of the IFTTT logic aka the IF-THIS-THEN-THAT logic . Basically, if the first set of instructions are done then execute the next function and after that the next and keep on repeating until you reach the end of the contract.

Train to Become A Blockchain Developer

The best way to understand that is by imagining a vending machine. Each and every step that you take acts like a trigger for the next step to execute itself. It is kinda like the domino effect. So, let’s examine the steps that you will take while interacting with the vending machine:

Step 1: You give the vending machine some money.

Step 2: You punch in the button corresponding to the item that you want.

Step 3: The item comes out and you collect it.

Now look at all those steps and think about it. Will any of the steps work if the previous one wasn’t executed? Each and every one of those steps is directly related to the previous step. There is one more factor to think about, and it is an integral part of smart contracts. Y ou see, in your entire interaction with the vending machine, you (the requestor) were solely working with the machine (the provider). There were absolutely no third parties involved .

So, now how would this transaction have looked like if it happened in the Ethereum network? Suppose you just bought something from a vending machine in the Ethereum network, how will the steps look like then?

Step 1: You give the vending machine some money and this gets recorded by all the nodes in the Ethereum network and the transaction gets updated in the ledger.

Step 2: You punch in the button corresponding to the item that you want and record of that gets updated in the Ethereum network and ledger.

Step 3: The item comes out and you collect it and this gets recorded by all the nodes and the ledger.

Every transaction that you do through the smart contracts will get recorded and updated by the network . What this does is that it keeps everyone involved with the contract accountable for their actions. It takes away human malice by making every action taken visible to the entire network. But, having said that, w hat mainly incentivizes these people to fulfill their end of the bargain anywa y? What are they getting by helping out the requestors? This is where Ether come s in.

Ether

Every single step in a smart contract is a transaction or a complex computation and would have a cost that is measured in “gas ”. The price of this gas is paid by the requester in “Ether ”. Ether is the currency with which everything runs in the Ethereum. When people talk about ETH and ETC they are actually talking about the value of the Ether in their respective blockchain.

Let’s check out the graph of gas prices over the years:

Every command has a specific gas limi t which ensures that a buggy piece of code doesn’t end up depleting your entire ether wallet. So basically, the main reason why people f ulfill their end of the bargai n in a contract is that t hey are incentivized to collect Ether.

What happens when your ether supply gets depleted in the middle of the contract? If you do not have the ether required for all the gas payments, then all the transactions that have already taken place during the course will go back to the original state. But, your ether wallet will still reflect the change in balance since all transactions made in the blockchain are irreversible.

Going forward it is very important that you have two things absolutely clear:

  • Smart contracts are how things get done in Ethereum.
  • Ether is the currency that is used in the Ethereum network to do anything.

What Is An Ethereum Token: The Ultimate Beginner’s Guide

T he primary difference between Ethereum and any other cryptocurrency is that it’s not just a currency, it’s an environment. Here anyone can take advantage of the blockchain technology to build their own projects and DAPPS (decentralized applications) through smart contracts . This is a very important distinction because this very thing shows you the true scope of what is possible in Ethereum.

Think of Ethereum like the interne t and all th e DAPPS as websites that run in i t. There is something really interesting about these DAPPS, they are all decentralized and not owned by an individual, they are owned by people. The way that happens is usually by a crowd-sale called the “ICO ” (more on that later). Basically, you buy certain tokens of that DAPP in exchange of your ether.

T hese tokens are usually of 2 varieties :

Usage Tokens: These are the tokens that act like native currency in their respective DAPPS. Golem is a pretty good example of this. If you want to use the services in Golem then you will need to pay with Golem Network Token (GNT). While these tokens have a monetary value they won’t give you any particular rights or privilege within the network itself.

Work Token: These are the tokens that identify you as a sort of shareholder in the DAPP. Because of that, you have a say in the direction that that DAPP takes. A perfect example of this is the DAO tokens. If you were a DAO token holder then you had the right to vote on whether a particular DAPP could get funding from the DAO or not.

Why Do We Need Tokens?

Right now you must be wondering, if all these DAPPS are made in the Ethereum Network, then why don’t we simply use Ether to pay for every transaction within those DAPPS? Why do we need a native currency for them? The answer to that is pretty simple, even in real life, there are tons of places where we use a form of token over cash.

Remember that time you went to the water park? Remember how they took your money and tied a band around your wrist which you used to gain access to all the rides in the park and to buy food as well? In this example the water park is the DAPP, your money is ether and the band is the token.

Okay, how about the time you bought those movie tickets for Wonder Woman and included an extra popcorn and coke in your ticket? The moment you entered the theater how did you get in the hall? You showed them the ticket. How did you buy your popcorn and coke? Again, by showing them the ticket. I n this case, the cinema theater is the DAPP, your money is Ether and the ticket is the token.

By using tokens to execute certain functions in the smart contract of the DAPPS you make the process much more simple and seamless . Plus, tokens are also great for the overall value of ether as well (more on that later). Before we go any deeper, let’s first learn how exactly can one create a token and how can a DAPP issue tokens in exchange of ether.

How To Create An Ethereum Token

The simplest way for you to create a toke n is simply going to Token Factory and check out their system. They have a superbly user-friendly system which you can use right away:

If, however you want to code your token s from scratch then you should definitely be well versed in Solidity aka the language used to code in Ethereum.

(You can also use Bancor to create smart contents, we will cover that a bit later in the guide.)

Token contracts can be very complicated but this is what a basic token contract looks like:

So let’s break down the code into its bare necessities. As you can see, there are three specific parts of this function:

  • The mapping
  • Giving the creator all the tokens.
  • Transfer the token to a sender for ether.

The mapping: This part of the code is the mapping part:

This creates a database wherein everyone can see the balance of your tokens. Tokens like ETH itself is logged into an open ledger. Anyone can see all the balances and transactions of that particular token.

Giving the creator all the tokens: In this part of the function, whoever has created the smart contract and tokens will get all the tokens:

Transfer the token to a sender for ether: Now finally, the last part of the code. This is the part where a sender can get an equivalent amount of token for the ether that they invest into the DAPP.

The function is very self-explanatory. Firstly, it will check if the sender has the requested amount of tokens in their balance. Then the code will deduct the said amount of token from the sender balance and then add that value to the recipient’s balance. It is very straightforward.

So as you can see, the creators of various DAPPS have to create their own tokens. While this might sound good on the surface, it was an absolute nightmare for wallets, exchanges and other smart contracts who were going to interact with various DAPPS and tokens. Why was it so bad? Basically, for every single DAPP who had their own unique token they would have to completely re-invent the wheel every single time to make their system compliant with the DAPP.

Imagine reinventing and updating your code time and again every single time you need to interact with a new token! Something had to be done to circumnavigate this problem. Vitalik Buterin, in DevCon 1 2020, introduced the Initial Standards Token which would solve all these issues. Fabian Vogelstellar, one of the founders of the Mist Wallet, then took these standards and polished them up and added some of his own to come up with the E thereum Request for Comments 20 aka ERC20 standard for tokens.

ERC20 Ethereum Standard For Tokens

T he ERC20 standard is basically a specific set of function s that developers must use in their tokens to make them ERC20 complian t. While this is not an enforced rule, m ost DAPP developers are encouraged to follow the standards to ensure that their tokens can undergo interactions with various wallets, exchanges and smart contracts without any issues. This was great n ews for everyone because now they at least had an idea of how future tokens are expected to behave. ERC20 tokens have gotten widespread approval and m ost of the DAPPS sold on ICO’s have tokens based on the ERC20 standard.

So, what does a token need to have to be ERC20 complia nt? It is basically a set of 6 functions that can be recognized and identified by other smart contracts, which in turn leads to seamless interactions. When executed, the following 4 basic activities are what all the ERC20 tokens required to d o:

  • Get the total token supply.
  • Get the account balance.
  • Transfer the token from one party to another.
  • Approve the use of the token as a monetary asset.

Ok so now that we have learnt what tokens are and what exactly they do. We have also learned how to create them and what rules they follow. But, the big question is, how exactly do you get your hands on them? When a new and exciting DAPP comes along, how do you get your hand on its tokens? The answer is through the ICOs.

What Are ICOs?

I CO s or Initial Coin Offerings are b asically crowd sal es, the cryptocurrency version of crowdfunding. The ICOs have been truly revolutionary and have managed to accomplish amazing tasks:

  • They have provided the simplest path by which DAPP developers can get the required funding for their projects.
  • Anyone can become invested in a project they are interested in by purchasing the tokens of that particular DAPP and become a part of the project themselves. (We are talking about Work Tokens here).

So, how does an ICO work?

Firstly, the d eveloper issues a limited amount of token s. By keeping a limited amount of tokens they are ensuring that the tokens itself have a value and the ICO has a goal to aim for. The tokens can either have a static pre-determined price or it may increase or decrease depending on how the crowd sale is going.

The transaction is a pretty simple one. If someone wants to buy the tokens they send a particular amount of ether to the crowd sale address. When the contract acknowledges that this transaction is done, they receive their corresponding amount of tokens. Since everything on Ethereum is decentralized, an ICO is considered a success if it is properly well-distributed and a majority of its chunk is not owned by one entity.

The DAO ($150 million) was the biggest ICO of all time until it was recently overtaken by Bancor ($152 million).

In the past 12 months alone a staggering $331 million dollars have been raised in ICOs.

NOTE: ICOs have become an extremely controversial topic nowadays because of the sheer amount of money that developers have been raising even before the creation of an Alpha version of their product. Some people are accusing it of being a Ponzi scheme. While we don’t exactly label it that, it is true that certain aspects need to be checked before proceeding with future ICOs.

How Does An Ethereum Token Get Its Value?

Now that we know how you can get your hands on you tokens, let’s find out what gives them their value in the first place. Tokens get their value from the same place that most things get their value. They are mainly two factors:

  • Supply & Demand.
  • Trust

Supply & Demand: This is basic economics 101. More the demand and lesser the supply more will be the price of the product. The supply-demand graph looks sorta like this:

The sweet spot where both the curves intersect is the equilibrium. So, how do Ethereum Tokens take care of supply and demand? Do you remember the token creation code? Specifically, the second part of the code? Let’s take another look now, shall we?

As this code implies, there is a fixed amount of tokens that can be issued in the first place. Each and every token is accounted for because like ether, token transactions are also recorded in the open ledger. If in case the developer wants to change the number of tokens issued, then they will have to create a new application. Any code that is issued in the blockchain is irreversible so the old application cannot be changed in any way.

So, now that we have a fixed and finite amount of tokens, that takes care of the “supply” part. What about the demand? The demand obviously depends on a lot of factors. What is the quality of DAPP in itself? Are people excited about the DAPP? Has that DAPP been marketed properly? Is that DAPP going to solve problems? If the demand of the DAPP is sufficiently high, and with the supply remaining constant, it goes without saying that the value of the token is going to be pretty high.

Trust: Like with any currency, tokens will only have value if people have trust in it. Trust comes from a lot of sources like the credibility of the developers, the kind of service provided by the DAPP etc.

Now that we have gained at least an introductory knowledge about tokens, let’s do some research on the 3 hottest Ethereum Tokens in the market right now:

Golem

Token Cap: 1 Billion GNT

Money Raised In ICO: $8.6 million

Think about this for a second. You are in your home with a super powerful PC and CPU and you are hardly using it at night, while at the same time, halfway around the world in Philippines, an animator is desperately looking to render a high-def video. Wouldn’t it be awesome if he could somehow access your computer’s power for the night and get his work done? With Golem that’s no longer a pipedream.

Golem describes itself as an “Airbnb for computers”. It is essentially a peer-to-peer network which is aiming to be the world’s first decentralized supercomputer. By tapping into the Golem network you can essentially “rent out” some of the CPU power in the network and use it for your own projects.

There are 3 kinds of people in the Golem network:

  • Requestors.
  • Providers.
  • Software Developers.

Requestors: These are people who want to access the power in the golem network. They can do so by paying with GNT (Golem Network Token).

Providers: These are people in the Golem network who are renting out their computer power. They get paid in GNT for their services.

Software Developers: These are people who are going to be uploading the software they develop into the Golem system. In case the requestors want to use their software, they will have to pay GNT to the software developers to gain access to their software and then pay the providers the required amount to rent out their computer power.

The Sandbox

There is one way that the Golem system can be exploited. Suppose a requestor rents out a provider’s hardware and uses it to run a virus code that steals all the data in that hardware or the entire system. What happens then? To counteract this issue all the transactions in Golem will be run in a sandbox environment. What does that mean? When you rent out a provider’s hardware you will be under a lot of rules which will restrict your movement. So, if you were a hacker you won’t really have the freedom to move about and do what you want.

The Graph

This is what the Golem graph, as of writing, looks like.

The Market Cap is currently sitting at

Pros

  • A very interesting concept which can effectively create the world’s first decentralized super computer.
  • Can give access to people living in poorer parts of the world to world-class computer machines.
  • The team behind Golem is very good and proven.
  • The value of GNT has been steadily rising over the last few years.
  • The sandbox environment contains any potential hacks.
  • Gives software developers a platform to release and showcase their software.
  • Makes good use of underutilized computer equipment.

Cons

  • Even though there is a way to contain any hacks, no-sandbox is perfect. A bug can be exploited which can render the entire system useless.
  • According to the roadmap given in their white paper, Golem will take 8 years to run at an optimal state which is too long a time.
  • Potential latency issues because of over-usage.

Future

It looks like Golem has a pretty bright future with a very interesting concept. Along with that, it has a very good team backing it, headed by a very capable leader. The team has been together since DevCon 1 and it looks like they have what it takes to make the concept really work. Seeing the growth in GNT’s value over the past few months, there is no reason to doubt their potential.

Augur

Token Cap: 11 million REP

Money Raised In ICO: $5.2 million

Remember that old game show “Who Wants To Be A Millionaire?” Every participant on that show had 3 lifelines, one of which was audience poll. Basically, if they were stuck on a question, they could ask the audience that question. The audience was then supposed to vote on the option that they felt (or knew) was to be correct. More often than not, the audience got it right. This phenomenon is called the “Wisdom Of The Crowd”, which states that groups of people, in general, are correct more often than individuals. Now what Augur did was use that same idea in prediction markets.

What Are Prediction Markets?

Prediction markets are speculative markets that allow users to purchase and sell shares in the outcome of an event. Suppose you have specialized knowledge in a particular field eg. A basketball match. By taking various factors into consideration you wager on the favorable outcome.

How does Augur work?

There are three kinds of people who use augur:

  • The Reporters aka the REP token holders.
  • The Wagers.
  • The Market Creators.

The ReportersThese are the people who own the REP tokens and are therefore obligated to report on the outcomes of their fields of choice. When an event is near maturation they report on the outcome (this will be discussed later). If they report wrongly or they do not report at all they risk losing 20% of their REP coins. The value of augur is directly proportional to the quality of the reporters. Why? Because if a lot of the reporters are dishonest then no one will want to use augur which will greatly decrease the demand. This forces all the reporters to remain honest.

The Wagerers: These are the ones who will be betting on the outcome of the future of the markets based on the reports by the reporters.

The Market Creators: They will be creating the markets for the reporters to report on and earn market fees as a result.

The Reporting Period

The reporting is done in 2 phases. Within the first month of the completion of the event, the reporters submit their report to the network which is tightly secured and kept away from the public. A month later, the second phase happens where the reports are shown in an open ledger which is free for all to see. When that is done, we reach a final consensus.


Aftermath Of The Consensus

  • The wagerers get their appropriate reward for putting their bets.
  • The reporters who reported honestly get fees from the wagerers.
  • The reporters who didn’t report correctly get 20% of their REP deducted and that, in turn, go to the reporters who reported honestly and correctly.

Let’s take a look at augur’s curve:

Current market cap is sitting at

Pros

  • Based on the concept of “wisdom of the crowd” which helps keep the whole system honest.
  • Helps to make correct future predictions for markets.
  • Forces the reporters to report honestly at the risk of losing REP tokens.
  • Not dependent on a central entity for market predictions that keep it free of human greed.

Cons

  • Tends to reward those who bought in early and accumulated REP coins as compared to newer buyers.

Future

Augur is growing from strength to strength but is facing stiff competition from Gnosis, which is a similar token. How it comes out of this battle will greatly affect its future.

Bancor

Founders: Bprotocol Foundation.

Token Cap: Unknown

Money Raised In ICO: $153 million

Bancor has shaken the crypto world down to its very foundation thanks to its ICO. People have invested a staggering $153 million into the company! So what is the noise all about? What is so interesting and exciting about Bancor? One of the problems that MAY affect the Ethereum community in the future is the sheer amount of tokens. While most of the popular tokens can be easily exchanged, the problem arises when you have rare tokens.

While you can easily exchange and buy tokens like GNT, what happens when you have tokens that nobody wants to exchange with? How do you liquidate your tokens then? This is where Bancor offers an extremely elegant solution. Bancor has come up with the idea of issuing smart tokens.

What Is A Smart Token

The idea of the smart token is to make tokens which completely do away with currency exchanges. Normally if you were to buy a token what happens is that you will have to go to an exchange, wherein someone will try to match you with someone else and after the transaction takes places. If you have a rare token that no one really uses, it can get hard to have someone match up with you.

So what bancor does is that it builds tokens with smart contracts built inside it. The smart contract has a mathematical formula inside it which allows you to have exchanges directly with the smart contract itself. Basically, it becomes its own market maker!

The Maths Behind Smart Tokens

The smart contract inside these smart tokens runs on the following formula:

Price = (Balance)/ (Supply * CRR)

Let’s examine the equation.

  • Price = The price of the smart token.
  • Balance = The money with which you were buying the token (ETH in this case because we are solely talking about Ethereum tokens).
  • Supply = The total supply of the tokens available in the market.
  • CRR = Constant Reserve Ratio. This is the ratio between the original balance and the market cap. This is a constant and will never change. Its value is always Denominator (Supply * CRR), the overall value of the price of a token will INCREASE.

Case 2: Selling your tokens

Now, what happens when you are selling a token? Since you are taking Eth out of the smart contract your “Balance” will go down. At the same time since you are literally commanding the smart contract to destroy the required amount of tokens, your “Supply” will go down. CRR being the constant remains the same as before.

Now put these values in the equation:

Price = (Balance)/ (Supply * CRR)

The numerator will still be greater than the denominator, but since the new numerator will be less than the original numerator (on account of balance reducing) the overall price will drop.

You can simply put numbers in the equation and check out the changes itself. So what exactly is happening whenever you are buying and selling new smart tokens?

Now, what happens if you sell a lot of coins at once and you don’t have enough balance to counter it out? The equation has been made in a way that it adjusts itself dynamically to any and all circumstances. If you are interested you can check out the Bancor white page where they have a couple more complicated formulas which very much proves that the equations will always hold true.

To Summarize

When you BUY smart tokens you are giving ETH to the smart contract and instructing the equation to literally come up with new tokens for your out of the thin air.

When you SELL smart tokens you are instructing the smart contract to destroy the required amount of tokens and deduct the value of ETH from your Balance and transfer it to your wallet.

Pros

  • Has completely taken the middle man out of cryptocurrency exchanges.
  • You won’t have to pay any extra taxes or charges because the middle man no longer exists.
  • The idea of smart tokens has enormous potential.
  • Makes sure that you can always liquidate your tokens.
  • Gives an interface for you to make newer tokens.

Cons

  • The ICO was highly controversial because they didn’t keep a market cap initially for close to an hour. Not keeping a market cap greatly affects the price of the tokens.
  • The idea of smart tokens can be a little tough to grasp for people who are new to cryptocurrency.
  • The idea is extremely nascent and untested.

Ethereum Token – CONCLUSION

Questioning the future of Ethereum tokens is the question the future of DAPPs and Ethereum itself. In the past one year, a number of tokens that have come out is truly staggering and it shows no sign of stopping. As long as people are looking to innovate on the Ethereum blockchain, you will be getting a new and steady supply of tokens.

Since a token can be anything fro currency, to real-world assets, to IOUs, tokens are going to evolve into becoming more and more versatile. Fabian Vogelstellar, the man who gave us the ERC20 token Standard has this to say about tokenization:

“I believe we are just at the beginning of tokenizing everything. Maybe in the future, you will be able to buy a share of the chair you are sitting on, the paint inside your house or a fraction of equity in a huge building complex.

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