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Tokens Over Function

“Every token should be a utility token.” The phrase stuck with me. Dan Morehad, founder and CEO of Pantera Capital, confidently stated during Consensu 2018. A lot of people have an interest in tokens from the regulatory side. That is not my focus. I am a strong believer in tokens as a key construct in most blockchain solutions, but not all. In this article, I dig a little deeper into the need for tokens within blockchain based solutions.

Defining tokens and transactions

I do not want to jump into detailing the need for tokens until they are clearly defined. Tokens in the context of this article are the assets that move about on a blockchain, being assigned to users through some accounting system. The two famous approaches are the UTXO approach—used by Bitcoin—and the Account based accounting—favored by Ethereum. (Variations of these two are all over different projects, but I favor generalization for the sake of keeping this short) These tokens act as the equivalent of a currency within different distributed ledger networks or even on distributed applications running on these networks (e.g. tokens created to transact within applications running on Ethereum). I intentionally separate these tokens from any other transaction data an application may record on a distributed ledger.

Tokens as an incentive system for network participants

The perspective of protocol developers that want to incentivize appropriate network participation is understandable. Specifically targeting validator and other authoritative roles. In this case the creation of an economic system, where usage/adoption creates value for its own token and this then creates a constant and cyclic incentive for network participants, is justifiable, specially on public blockchains. This is a clear cut scenario in which tokens become a core building block of a blockchain solution and it's value.

Tokens as access control

When it comes to access control, tokens also seem a natural choice. If the underlying protocol needs users to buy into authoritative roles, or guarantee their good actor standing by demonstrating large holdings (having enough skin in the game, where it's not worth becoming a bad actor) tokens seem like the best way to achieve this. The now familiar stake based consensus algorithms being deployed by popular public and consortium based blockchains are also clear implementations of a token as a core building block of a blockchain solution.

Tokens as a core functional requirement

On networks that do not require incentives for their participants or ones that control access adding a token seems unnecessary at first glance. Looking through different categories of blockchain solutions, most private or permissioned solutions would work perfectly without any type of token flowing through the systems internal network. Specifically the ones that control access through off chain means, or incentivize network participants through a different system.

Options for tokens within Hyperledger

Having mentioned that most permissioned solutions are not meant to have tokens as a core construct, does not imply that there will be NONE that do. This is use case dependant ultimately. On that note, I wanted to close out by highlighting the fact that Hyperledger Sawtooth has a pre-built framework to add tokens into it's projects. A company called Pokitdok defined and shared a transaction family that can be used to add cryptoasset to sawtooth buildouts.

Tokens as end game

To summarize, this list is not meant to be an indictment on token based implementations, on the contrary a clarification as to why tokens are needed. At HelloBuild we have had the opportunity to work on token based and non token based DLT solutions. If you are thinking about which one works best for you, do not hesitate to reach out.

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