(Alt)coins, tokens & Co. – the secret weapons of a block chain platform
Cryptocurrencies – i.e. coins and tokens – make up a relevant part of their functionality and a whole lot of their appeal.
While classic currencies such as the euro, the dollar or the yen are characterised by relatively high stability of value – despite the speculators – and interest rates for capital investments are at historical lows, the crypto scene is in a gold-digger mood. What investors think they cannot earn on the stock market, they try to achieve with cryptocurrencies.
Forging bare (crypto) coins
Crypto-currencies are a generic term for two categories of block-chain linked assets: coins and tokens. The “demarcation line” for distinguishing between the two “crypto-values” may be somewhat blurred, but it does have certain implications.
A coin owes its existence to the block chain protocol. A token (literally: a token) originates from a smart contract. A smart contract that can be executed by several block chains (e.g. Ethereum and Sawtooth with Seth, see the report “Sawtooth block chain for mission-critical applications”) is typically able to handle the corresponding tokens in all these block chain networks.
The oldest and best known coin is the Bitcoin. Since the hard fork of the Bitcoin block chain, this crypto currency has even been available in two variants in two separate block chains: Bitcoin (BTC) and Bitcoin Cash (BCH). All other coins are called Altcoins.
There are a lot of altcoins: Lightcoin, Namecoin, DODGE (the native currency of the Dogecoin block chain), Ether (ETH) and Ether Classic (ETC).
Coins remind us in many ways of conventional money coins. They are characterized by the following features, among others:
Fungibility: Coins with the same nominal value are interchangeable,
Subdivisibility: Just like with conventional money, the paying block chain user can keep his “change” and does not need to lay out a whole coin at once;
Acceptance: Similar to cash, crypto coins can also be used to make payments,
Portability: Coins can be transferred (from address to address),
Longevity: Unlike in the case of loyalty points (i.e. tokens), it can be assumed that a coin will retain its existence for the foreseeable future and will not simply disappear into nothingness,
Scarcity: The availability of a coin is firmly limited.
Tokens can emulate a coin, but they can also differ diametrically from it in their properties.
Tokens: “Tokens” of the crypto revolution
A token is an application-related, secondary asset in a block chain ecosystem. A token is created by executing a smart contract that creates that token. A token usually exists separately from the coin of the respective block chain. However, Ethereum users who want to settle transactions in tokens need enough ether to be able to pay for the execution of the associated smart contracts and the validation of the transactions.
Both coins and tokens can transfer assets, provide economic incentives to participate in the network and serve as an investment. The Berlin-based start-up Bitwala enables cross-border transactions in over 120 countries via SWIFT and SEPA using Bitcoin and some Altcoins. The company also offers a prepaid debit card denominated in Bitcoin with compatibility with the VISA network. Ripple has set up an international payment network based on its proprietary token, the XRP.
Crypto-token generally support a much greater variety of practical usage scenarios than coins on their native blockchains. The latter is due to the fact that the close integration of a crypto currency with assets in the real economy via the business logic of smart contracts results in added value: the ability to control the physical reality from within the block chain. This is what is known as a utility token.
From crypto currencies to crypto economy
In the media, only a handful of crypto-currencies get almost all the attention, and that almost exclusively in the context of speculative transactions or fraud. The reality is much more nuanced, only tangible usage scenarios are not quite as effective for the media.
Of the supposedly 3,000 or so crypto currencies in existence, only about 250 are actually active. Of these, only about 25 have a significant trading volume (including ETH, LTC, BTC, DASH and XRP). This means that only less than 1 percent of active crypto currencies are potentially really relevant in crypto stock exchange trading.
Bitcoin (BTC), denominated in Satoshi, is used here and there as a means of payment and is traded as a coveted speculative vehicle on crypto stock exchanges (see also the report “DEXs: Decentralized Marketplaces and what they do”).
Ether (ETH), denominated in Wei or Gwei (Gigawei), is the native coin of Ethereum, where as the primary internal means of payment of the network, it enables the trading of computing time (“gas”) to execute smart contracts. (1 Wei is 0.000000001 ether; 1 ether is 10^9 Gwei). The transaction costs are expressed in gas and the prices are paid in Gwei. These payment flows create the necessary computing time to execute smart contracts, which in turn can create their own tokens on the Ethereum chain. In the meantime, entire ecosystems have emerged around Ethereum tokens.
Tokens can create significant financial incentives for both the participants in a block chain platform and the end users of block chain-based systems. Some have more speculative potential, others have concrete utility value.
Indeed, many companies use block chain tokens as a “secret weapon” of block chain technology in many practical application scenarios, most notably as an internal currency of the ecosystem. For example, ripple for international transactions.
The crypto currency Ripple (XRP) is actually a token generated by a smart contract. In terms of both trading volume (XRP 43 billion) and market capitalisation (as of 13 January 2020: ‘8.29 billion), XRP is the clear number three among crypto currencies. The declared aim here is to enable fast and cost-effective transactions on an international scale.
The Ripple network itself is not quite as large as one might assume from the high market capitalization: there are just 33 active validators.
Recently, Ripple has integrated the three products xRapid, xCurrent and xVia into RippleNet. The Ripple product range has been totally confused up to now, simply because there were so many different products that were actually one and the same – products based on Ripple – that the target group no longer had a clear view.
So the company decided to consolidate the three products xRapid, xCurrent and xVia into a single offering called RippleNet. This move may expand the use of XRP digital assets as a form of cash remittance. All banks that previously used the xCurrent product will automatically join RippleNet.
Fast and low-cost transactions have often been one of the few truly useful deployment scenarios for crypto currencies. Ripple has bought the American money transfer company MoneyGram International, Inc. from Dallas, Texas, and expects to get a bargain from classic banks.
In the past, the company has made efforts to position XRP-Coin as a relevant use case for the interbank payment network. But apparently, the xCurrent interbank payment network works as a distributed ledger even without XRP. As long as investors were convinced that the XRP coins were absolutely necessary to carry out the so-called interbank payments (i.e. financial transactions between banks) in the RippleNet, the interest in XRP was enormous. During the high flights of XRP, the maximum value of XRP was just over 3 US dollars. Today XRP has fallen to 0.21 US Dollar (as of 13.1.2020), less than a tenth. A truly hard landing.
Without a special unique selling point, however, the enthusiasm for the XRP coin and the associated RippleNet network has cooled down. But in search of a use case, Ripple apparently does not give up. With the purchase of MoneyGram for 30 million US dollars (Reuters: June 17, 2019), the company is trying to remain relevant.
Although RippleNet’s XRP Coin does not have a unique selling point in terms of fast and low-cost transactions, it does seem to be attracting some interest in the financial industry. Ripple now has over 200 customers.
Ripple’s attempt to challenge the legacy banking system with the Crypto-Coin XRP has proven to be a difficult undertaking. However, Ripple has achieved some success with RippleNet and XRP. However, a real breakthrough is yet to come.
“Tokenization” of the digital transformation
The relevance of crypto currencies and tokens stands and falls with a concrete use case.
The list of proven usage scenarios for block chain tokens is now quite long. It includes about:
an internal currency: tokens can be used to process transactions, implement accounting procedures and store values;
a protection of transaction integrity: tokens can help to improve data consistency by allowing the block chain to punish abusive receipt of data in an appropriate consensus process;
a tool for creating incentives: tokens can enable access to certain features of the block chain platform and encourage active participation in the block chain ecosystem; a block chain start-up called Audius (audius.co) gives the owners of the Audius token a share of the proceeds from music sales;
an instrument of platform governance: tokens can convey voting rights and other similar privileges;
registration of ownership: Tokens can be linked to assets and transfer them between network participants; BigchainDB GmbH has created a platform with Ascribe that can document the ownership of digital works using platform tokens (currently the solution is only available in self-hoster mode for scalability reasons).
Sharing-Economy: the Blockchain enables users to keep non-divisible assets in partial ownership. For example, the Berlin start-up mybit is currently brokering shares in a solar park in Italy.
Profit or revenue distribution: The transfer of the claim to dividends, or similar, can be implemented with the help of tokens;
Financing instrument: Many successful block chain start-ups use tokens for crowdfunding their activities; the proceeds from a token sale are used to finance software development or other initiatives of the respective block chain community. The Berlin-based start-up Neufund offers interested companies a platform for processing ICOs (Initial Coin Offering).
An instrument for granting loans: The tokenization of assets opens up possibilities for securing loans.
Some of the most interesting application scenarios, even beyond the financial sector, can book tokens from block chains like Ethereum – the so-called utility tokens.
Golem operates a decentralized supercomputer on the basis of “block-chainerized” IT resources. Participants in the Golem network can make the unused computing time of their systems available to other users in exchange for the ecosystem’s internal crypto currency, the GNT token. Golem aggregates these resources and offers them for sale to interested users. Those who need more computing time in the short term can reserve it with the help of the Golem Dapp and pay for it in GNT tokens (see also the article “Decentralised block chain applications: Developing and monetizing DApps”). Smart contracts regulate transaction processing and service provision; the whole thing runs entirely on autopilot thanks to the connection of real IT resources to the block chain’s “intelligence” – the smart contracts. The GNT token is based on the block chain infrastructure of the Ethereum network.
Coins and tokens have the potential, for better or worse, to turn the economy around. In the long term, however, only those coins whose block-chain ecosystems offer added value are likely to prevail. One such possibility is offered by smart contracts and their crypto-tokens.