Chapter 2. Token Use Cases
This chapter covers a selection of use cases to showcase different token types as well as select industries that might be disrupted as a result of tokenizing their business models. Some of these use cases are already operational, but many of them are still in a conceptual phase. However, the selection of use cases is intended to give an overview and insight into the state of a potential token economy.
Stable Tokens
As you will see in the next chapter, stability of value is one of the most important functions of money in order for it to serve as a medium of exchange. The aim of stable tokens is therefore to provide a stable store of value, unit of exchange, and unit of account represented by a cryptographic token that maintains a stable value against a target price, like the dollar or euro. These stable tokens are designed to replace or complement current fiat currencies and are therefore designed as fungible and transferable with a circular token flow. The success of stable tokens could potentially resolve one of the biggest bottlenecks to mass adoption of tokens as a medium of exchange. For a token to fulfill the role of a medium of exchange, it therefore needs to be stable in its purchasing power, or slightly inflationary so that token holders are incentivized to spend their tokens rather than holding on to them. Over the years, various attempts have been made to achieve stable tokens:
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Fiat-collateralized or commodity-collateralized stable tokens like Tether, TrueUSD, Circle, and Digix
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Crypto-collateralized stable tokens like Maker (DAI), Sweetbridge, Augmint, and Synthetix (formerly Havven)
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Algorithmic stable tokens like seigniorage shares like Carbon, Kowala, and Steem Dollar
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Central Bank Digital Currencies (CBDCs)
Fiat-collateralized or commodity-collateralized stable tokens are similar to traditional banknotes issued by institutions other than a central bank (e.g., private currencies issued during the free banking era of the United States). It is important to note that most of these token types still lack rigorous research and stable governance mechanisms to make good on anything they claim about the properties of their automated economic systems. Even though many stable token projects attempt to achieve token stability, no clear best practices have been established yet (other than potential CBDCs). References to projects might not age well but are a valid starting point for research and development.1
Attention Tokens—BAT
The idea of the Basic Attention Token (BAT) is to use tokens to create a more transparent and efficient advertising market in which users’ attention can be rewarded with a token. This happens with an attention token, the BAT, and a Web3-enabled browser. The BAT project wants to reinvent the way users, publishers, and advertisers interact. The BAT project is a proposal for a decentralized ad exchange that is accessible with a decentralized application, a Web3-compatible browser, currently the “Brave” browser that comes with an integrated wallet for following two tokens: BAT, used for value transfer, and Basic Attention Metrics (BAM), which ensures that user attention is accurately tracked and reported. The BAT token can be used as a transfer of value among publishers, advertisers, and users. In this setup, users are compensated for viewing ads in a privacy-preserving manner with BAT tokens; publishers receive a bigger stake of the advertising revenue than they would today; and advertisers can gain a better return on investment as well as more accurate data on user behavior.
BAT reverses the role of the players in the advertising industry and redefines the question of who owns your attention and your web-browsing experience and who gets paid for what by whom. BAT is designed as a fungible and transferable payment token that compensates for user attention. This means that it has attributes of a currency specific to an online advertising network, but without a built-in stability mechanism. The token supply was limited at the initial token sale. Users can opt to see certain ads from companies in which they are genuinely interested or pay a fee to not see any advertisements at all. Advertising is performed locally in the browser. The value proposition is that BAT tokens store all personal data locally instead of sending data to the servers of third parties. BAT should remove the need for third-party tracking, giving companies direct access to metrics that can improve the effectiveness of targeted advertising. Unsourced tracking and bots are hereby substantially reduced. The BAT project is in a very early development stage, but it’s one of the more interesting use cases this new token economy has to offer.
Nonfungible Tokens
Although many tokens issued in the early years of blockchains and token sales represented fungible tokens, nonfungible tokens (NFTs) seem to be an exciting new token class that in and of itself is very diverse and could by far exceed the impact of native-blockchain tokens or other fungible tokens. NFTs are digitally scarce assets, which allows for the programming of unique attributes into a token. NFTs began to attract a lot of attention after the success of the crypto-collectible game CryptoKitties in 2017. Offering and managing digital, unique, and thus scarce assets like collectibles is not a new thing, but before the emergence of blockchain and other distributed ledgers, this type of scarcity was costly to manage. It relied on the validation and security of the centralized issuing entities. Distributed ledgers, on the other hand, enable a decentralized and publicly verifiable substrate to issue and manage these assets at very low operational costs. NFTs furthermore enable the tokenization of all types of assets, whether digital or real. The following sections look at some selected use cases.
Crypto-Collectibles and Crypto-Games
Crypto-collectibles allow you to tokenize ownership of something unique and the thrill of comparing it to others. NFTs can be used to represent such unique in-game assets, to be under the control of the user instead of the game developer. A leading example is CryptoKitties, a game on the Ethereum blockchain in which players can collect and breed digital cats, which they pay for in ETH, and where each cat’s digital “genetic material” is stored on the Ethereum blockchain. CryptoKitties spurred a lot of attention to this new asset class when it clogged the Ethereum network. It currently has 2,700 monthly players, while at peak times it had up to 14,000 daily players. It is an interesting use case to analyze in detail because many subsequent crypto-collectible games are forks in some form of its codebase. Major League Baseball in the US is planning to launch a game in which baseball cards can be exchanged on the Ethereum blockchain. Just to provide an idea of how much is already in development, here is a selection of games, collectibles, and marketplaces that trade them:
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CryptoFighters
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Decentraland
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Etherbots
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Etheremon
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Gods Unchained
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Plasma Bears
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0xUniverse
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HyperDragons
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Loom
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Spells of Genesis
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SuperRare
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terra0
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UNICO
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OpenSea
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OPSkins
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Rare Bits
Asset Tokens and Fractional Ownership
NFTs also allow unique investments tied to a physical object, like unique artwork, real estate, or any other real-world assets and securities. They furthermore allow fractional ownership of goods that previously were not easily divisible, such as, again, real estate, artwork, or other memorabilia. The owner of an asset, for example, might want to liquidate some of an item’s value but still control the physical asset itself. Physical goods that are nondivisible can be tokenized and then divided and sold off in different parts. The more easily divisible a token is, the more fungible it becomes. Divisibility refers to the fact that you can send a fraction of the token to someone else. In the real world, many real assets cannot be divided, which makes them less easily tradable. Cryptographic tokens representing goods, which were not easily divisible before, can now be fractionalized at lower transaction costs than are possible with established systems.
However, there are practical limitations to redeeming a represented asset, such as a piece of art. Also, even though there is no limit to making tokens divisible to 100 decimals, it is not economically feasible to do so. The overhead is huge when dealing with trillions of addresses that can and will hold leftover “dust.” “Dust” in this context refers to very small amounts of unspent tokens that are often not worth transferring given that the transaction fees might be more than the dust is worth. There is a point at which the marginal utility of extra divisibility is outweighed by the extra computational effort (storage and bandwidth).
Fractional tokenized ownership might allow a new array of asset classes, like real estate or art, and make those assets more liquid and fungible. Tokenizing physical objects gives investors a chance to expand their portfolio and allows for easily programmable and thus more flexible classes of investments. You could tokenize a building, where some tokens could grant simple ownership titles for a fraction of the real estate, whereas other tokens could grant special privileges such as access rights. The owner of a painting could sell a minority of the shares in the artwork, representing a fraction of ownership, but maintain physical control over it. NFTs can furthermore program complicated access rights and voting rights into the token. Tokens can be programmed to endow token holders with different levels of investment or with different levels of control over the object. A museum, for example, could allow the public to purchase shares in artwork in order to raise money to buy a new piece. In that case, the museum wouldn’t hand over control of the piece, but they would grant token holders the opportunity to invest in it and offer them privileged access rights to the art in question. NFTs also find potential use in digital art, by helping prove provenance, authenticity, and ownership.
Identity Tokens and Certificates
NFTs can also represent IDs or certificates, such as school transcripts, university degrees, software licenses that are tied to the existence of one single person, or memberships. Anything that uniquely represents a person could be represented as a nonfungible token. A diploma could be issued on the blockchain and universally recognized by authorities around the world, with no need to translate, notarize, or verify it, if and when a reliable repository of trusted issuers of such certificates can be established. Wallet-like software could manage all personal data without the need for centralized institutions to store our data. The token hereby represents a container for identity information related to a specific person without giving information about whom it identifies. These identity tokens allow for claims to be associated with the token (the container of information). In the Web3, we can now detach core personal data (objective information about a particular person, such as that person’s name, address, and school degree) from the verification process of that data that can come from individuals or institutions like governments or other trusted parties. Identity tokens can rewire the way the internet works and give control over personal data back to the users.
Identity tokens can also come with an attached transaction history, attached content, and attached reputation tokens. If properly designed, reputation tokens might be able to resolve, or contribute to resolving, the “fake news” problem of social media sites. You could lose reputation tokens if others can prove that the source of the news is fake. However, the design of such reputation tokens is complex and depends on the use case. Functional and representative reputation token design is probably the holy grail of decentralization and could be the subject of a book of its own.
To sum it up, NFTs allow us to manage proof of identity while keeping the identity information securely stored by itself, making it impossible to forge or steal it.
Access Tokens and Access Transfer Tokens
NFTs can also be used to create access tokens to replace existing keys or passes that grant access to physical resources. In the physical world, we have been using keys to open the doors to our homes or our safes. This technology has been around for hundreds of years. Just as a key represents access to your home, an NFT could be used to manage any type of access right that is tied to a specific person, a specific property, or a specific event. The software world manages access rights with passwords, which grant permission to open your mailbox, access a server, access a service that you paid for, and more. Blockchain technology uses public-key cryptography to manage assets or access rights and can therefore offer more publicly verifiable access-right management infrastructure. My key pair cannot be replaced by anyone else’s key pair, in the same way that a passport cannot be replaced by another one.
When someone passes away today and bequeaths a physical object to be split between multiple people in the will, it results in a bureaucratic and often time-consuming process to manage the splitting of the asset. The beneficiaries might be forced to sell the property and split the money between themselves. Fractional ownership tokens in combination with multiple smart contracts that reflect the functions of wills could resolve many of the problems and time lags in today’s will management process.
Purpose-Driven Tokens: A New Type of Value Creation
The Bitcoin network showed us how it is possible to create a public infrastructure by rewarding people with native-network tokens if and when they contribute to the security of the network. This has since inspired many projects to build on this principle of incentivizing behavior with what I like to call purpose-driven tokens. Such purpose-driven tokens are programmed to incentivize individual behavior in order to reach a collective goal. This collective goal might be a public good (for example, a P2P payment network like the Bitcoin network) or the reduction of negative externalities of a common good (for example, CO2 emissions). Bitcoin’s “Proof-of-Work” introduced a novel approach that transcends classic economic value creation. The protocol provides an operating system for a new type of economy that can transcend nation states and individual organizations. In a Proof-of-Work blockchain, consensus among the nodes is reached by incentivizing miners with native network tokens to use their computing power to secure the network. The aim is to reach distributed consensus among untrusted network actors on the state of the network—the ledger. The reward mechanism is based on the assumption that all network actors are potentially corrupt; therefore, the process of writing transactions to the blockchain is intentionally made difficult and inefficient, making it costly for malicious actors to attack the network.
But Proof-of-Work is not the only way. Many other blockchain projects are experimenting with alternative consensus protocols to achieve a common goal of creating a public infrastructure like a P2P payment network (Bitcoin, Zcash, Monero), a P2P computing network (Ethereum), or a P2P file network (Sia). The tokens of the underlying network are purpose-driven and the incentive mechanism is derived from the purpose. Tokens are therefore an integral part of the mechanisms of decentralized networks like the Bitcoin network or the Ethereum network. Using the vocabulary of a computer scientist, the protocol hereby provides an operating system for a new type of economy, incentivized by the native token, which also acts as “legal tender”2 within the system. If we think of the Bitcoin network as a closed ecosystem, BTC can be considered as legal tender within the Bitcoin network because it is the only accepted form of payment in this ecosystem. (BTC is needed to pay for transaction costs in the network. They cannot be paid with fiat money such as dollars, euros, or other cryptographic tokens.) Using the vocabulary of a political scientist, the protocol represents the constitutional foundation for a distributed internet tribe participating in that network. This distributed internet tribe is a group of voluntary participants of the network that transcends the geographical boundaries of nation-states.
As we can see from all the mentioned token use cases, the emergence of blockchain networks and other distributed ledger networks has the potential to contribute to the tokenization of all our social and economic interactions. However, it is unclear when such a full tokenization of all economic activities might become feasible. At this early stage of an emerging tokenization of economic activities, it is unclear how such tokenization of goods and services might affect the overall dynamics of our current economic system, and whether there are effects beyond its tokenized parts. Token economics is an emerging field of economics that deals with such questions. One fundamental question is whether and how the emergence of tokens can replace or change the current role and functions of money as we know it.
1 Details of the aforementioned stable token types are beyond the scope of this report, but you can research them online. Stable token types are discussed at length in my book Token Economy (BlockchainHub, 2019).
2 In economics, legal tender constitutes a form of money that is accepted as a form of payment within a legal system.
Social Media Tokens—Steemit
Steemit is a decentralized application with similar functionalities to Facebook or Reddit, by which contributors to the network are rewarded with network tokens. It runs on the Steem blockchain, a special-purpose blockchain network that provides a public infrastructure for the decentralized social network. As opposed to Web2 social media applications, Steemit has no advertisements; all data is public on the blockchain, which means that no single institution owns your data; and contributors to the network are rewarded with different types of Steem tokens. As of this writing, the network has more than one million registered users, 25,000 posts, and 100,000 comments per day, as well as 1.4 million transactions per day on the Steem blockchain. It is therefore one of the more seasoned projects in the crypto community. Users of the network have three different token types, with varying functions; there is the native token of the underlying blockchain—Steem (STEEM)—and two smart contract tokens: Steem Dollar (SBD), which has the function of a stable token, and Steem Power (SP), which has the function of a reputation token. In this setup, users are rewarded with network tokens for contributions to the network. Content creators post content to the social network. If someone else upvotes that content, both creator and curator are rewarded with network tokens. Anyone can upvote content, therefore contributing to the collective curation of content. How much you’re paid is a function of the number of contributions and the popularity of your contributions. All three tokens are designed as fungible and transferable tokens. In some cases, transferability is limited or conditional. The biggest design flaw seems to be that the reputation token, which is designed as a reputation token, is fungible and transferable, which means that reputation can be bought. The details of the token design are beyond the scope of this report, but you can research this online. They are also mentioned as a use case in my book Token Economy.