What are Tokens?
In the past, we lived in a world that thought of “value” through the lens of templates. Templates are useful, but they also create constraints and bias.
This old - world view - causes a lot of confusion for newcomers to Web3. One obvious example is that people generally conflate tokens with “currency”.
Equity represents the residual claims on the cash flow of a company.
Debt is a contractual claim on an entities assets, with the rights to fixed cash flows.
Tokens are Programmable Containers of Value
Instead, it may be helpful to think of tokens as “containers” within which you can design value in an unconstrained way - i.e they are “programmable”.
These programmable containers of value move frictionlessly on digitally native infrastructure called blockchains similar to how programmable packets of information move frictionlessly on the internet.
So what are the implications of digital programmable value? Quite radical, if you ask us.
In the abstract sense, anything “valuable” can now be captured in these digital containers called tokens. In short, we will witness the emergence of new value primitives in this digital ecosystem.
From a technical perspective, tokens can represent anything from store of value or confer claims, rights or permissions in the physical, digital and legal world. These containers move natively on the blockchain, which means that tokens facilitate more transparent, efficient interaction between market participants in the exchange of value (through price discovery and liquidity).
- To Accrue Value and Enable Trade
- To Directly Incentivize Behaviors
- To Provide Utility to a Network
Tokens Facilitate New Incentive Paradigms
Tokens offer a broad creative space because they are unconstrained, programmable value. It is an enabler of new incentive design because tokens provide the medium to incentivize participation towards that common objective.
Because the value of tokens are determined by market forces, it means that markets are now arbitrating behavior as opposed to a system with human created rules and intervention, which is likely to be more robust. Ultimately, this allows for incentive structures that are able to create business models/games/platforms that were never possible
Every network or ecosystem will have its own specific objective, and a Token is a strategic enabler that could be used to steer participants behavior toward that objective.
- While the section above is a universal definition of tokens, NFTs are a sub-classification within the Token taxonomy.
- NFTs are unique in nature with varying properties that can be distinguished from each other. NFTs can represent unique, and scarce assets.
- Examples include, art, collectibles, real estate, identifies, intellectual property etc.
- ERC-721 token standard allows for more detailed attributes that make a token special, beyond the attributes that can be found in ERC-20 tokens. It includes metadata about an asset and information about ownership.
- Specifically in gaming, NFTs can be used to represent any in-game asset, to be owned and controlled by the user instead of the game developer.
What is Web3?
Web3 is a decentralized internet with both an information and value settlement layer. It has embedded infrastructure that allow the value created in this digital system to be captured by a broader cross-section of stakeholders in contrast to the current version of the internet.
In contrast, Web2 characterized by monolithic tech giants harvesting a substantially portion of the value created by its users. Facebook, Google and Amazon monopolized key pieces of internet infrastructure that are supposed to act as public utilities. In Web2, we are beholden to these centralized monopolies.
In Web3, these public utilities will be refactored into distributed, decentralized systems. Web3 has the potential to create fairer distribution of value in digital ecosystems.
Moreover, Web3 is an integrated and composable set of digital infrastructure allowing for a magnitude of scalability that we have never seen before. There are two main reasons:
Financial Settlement Layer - Value now move as efficiently and frictionlessly in digitals containers on blockchains in the same way that information moves frictionlessly in digital packets across the internet. This takes out an incredible amount of friction that exists within the traditional financial system. The outcome of this is greater inclusiveness, lower cost of participation, and fairness of access that previously didn’t exist. This allows for the scaling of efficiency and speed of access.
Social Layer - Web3 systems employ tokens to design new incentive systems to coordinate vast network of participants. The design space of incentives has expanded exponentially creating novel approaches of social engineering, which gives us the ability to tackle difficult social conundrums such as the “tragedy of commons”. This is scaling complexity in social structures.