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Coins and Tokens in Blockchain

"Coin" refers to a currency, while "Token" is translated as "代币" (also referred to as "通证"), meaning "universal proof." Most people generally refer to both as "coins," but in reality, these are two completely different concepts.

When discussing blockchain, the issue of "coins" cannot be avoided; otherwise, it would be like "burying one's head in the sand." However, blockchain does not equal coins, and coins certainly do not equal blockchain. Not all blockchains must have coins, but some blockchains cannot function without coins. Hence, there is a distinction between "coin blockchains" and "non-coin blockchains."

In the original sense, the "coins" of blockchain are the "GAS" (fuel) of public chains, as chains require nodes and miners. Miners are the builders and operators of nodes, and their support for the chain's operation requires investment and returns. Applications and transactions based on the chain incur costs, thus necessitating "GAS," which is to say "coins." The native "coins" of public chains are generally referred to as "Coins."

"Tokens" essentially serve as proof of rights and are divided into "equity tokens" and "functional tokens." "Tokens" typically appear in various application-based blockchain projects that are born from public chains. "Equity tokens" are closer to securities, essentially representing the equity of the project or company issuing the "Token"; whereas "functional tokens" are designed to enhance user experience, facilitate ecosystem development, and serve as incentive mediums during the use of the application. Therefore, the pricing and appreciation basis of "equity tokens" generally rely on the future value of the project's development; while the pricing and appreciation basis of "functional tokens" generally depend on the pricing of services within the project or the number of future users of the application, as well as the scarcity created by the economic model's design.

Whether or not to have coins fundamentally depends on the positioning and economic model of the blockchain project itself. For example, public chain projects generally have coins, while consortium chains and private chains typically do not require coins. Why is this the case? Because participants in public chain projects are unspecified and completely open, allowing everyone to participate, contribute, and use the chain. However, the development, maintenance, and operation of public chains require participation and investment. Without coins, where would their returns come from? Without a reasonable economic model based on coins, no one would be willing to participate. In contrast, the investments and returns in consortium chains and private chains are fixed and specific, so they can operate without coins.

For example, a public blockchain can be roughly understood as a programming language for network development, such as C++ or Java, serving as a foundational support technology. However, unlike programming languages, public chains require nodes to perform distributed accounting, transactions, and maintenance in addition to the evolution of the technology itself. First: if using a traditional fiat currency model, how can we motivate all parties involved before the technology generates benefits, or when the benefits are not substantial enough? Second: if using a traditional fiat currency model, how can parties involved settle transactions in real-time, effectively, quickly, and without spatial and temporal limitations? The answer is clear!

— Coins refer to any cryptocurrency with its own independent blockchain (e.g., Bitcoin, Ethereum, XRP, etc.)
— Altcoins refer to other coins besides Bitcoin.
— Tokens do not have their own blockchain but rely on other blockchains. Tokens benefit from the blockchain technology they are attached to. (e.g., ERC-20 tokens…)

Coins refer to any cryptocurrency with its own independent blockchain — for example, Bitcoin.

Such cryptocurrencies are developed from scratch, and their broader network designs have clear purposes. For instance, Bitcoin serves as a secure, fixed monetary policy and a medium of exchange. Bitcoin's native token, BTC (i.e., Bitcoin), is the most liquid cryptocurrency in the market, holding the highest market capitalization and realized market value in the cryptocurrency space.

Coin projects often draw inspiration from past technologies or other cryptocurrencies, integrating them into an innovative network that meets specific purposes.

As another example of a coin, Ethereum's Ether (ETH) is the native coin of the smart contract platform, used to create general-purpose computer programs that run on a decentralized blockchain. Compared to financial data, Ethereum focuses more on all program data, ranging from games to social media. Ether is used for sending/receiving, managing assets, paying gas fees, and interacting with decentralized applications (dApps) within the network.

Tokens are special fee carriers for various smart contract platforms (such as Ethereum), allowing users to create, issue, and manage tokens (derivatives of the main blockchain) on such platforms.

For example, the ICO boom in 2017 was driven by Ethereum's ERC-20 token standard, which essentially serves as a protocol for creating tokens (excluding Ether ETH) on the Ethereum blockchain, allowing these tokens to be exchanged with one another. Projects publish or develop applications on Ethereum through smart contracts, issuing the native tokens of those applications while directly raising funds from Ether ETH investors.

Tokens occupy a unique position in the cryptocurrency market, acting as "utility" tokens within application ecosystems to incentivize certain behaviors or pay fees. For example, the popular ERC-20 token Dai is part of the decentralized application MakerDAO on Ethereum. MakerDAO allows users to utilize credit tools, such as borrowing/lending Dai, which is specifically designed to maintain a stable value. Similar ERC-20 tokens like Dai can be exchanged for any other ERC-20 tokens or other Ethereum-based standards (i.e., ERC-721), including Ether ETH.

Thus, just as Dai relates to the Ethereum ecosystem, tokens are determined by specific applications within a broader cryptocurrency/blockchain network.

In addition to Dai, other tokens include Maker (MKR), 0x, Augur (REP), Komodo (KMD), and Golem (GNT).

Coins need to be exchanged through cryptocurrency exchanges because different coins are developed on different non-standardized code protocols. In contrast, various tokens on Ethereum (e.g., ERC-20) can be exchanged with minimal friction due to their development on standardized code protocols.

Entering the cryptocurrency market is challenging, but understanding the basic differences between various cryptocurrencies can help you manage risks and make better decisions in an unstable ecosystem.

ICO vs IPO: Wild Investment

You may know about "Initial Public Offerings" (IPOs), where a company sells a portion of its shares to institutional investors, who then sell the stocks to the public on a stock exchange. The public is excited about IPOs because anyone with a brokerage account can purchase shares in companies like Snapchat.

Is an ICO the same thing? Yes and no. Both IPOs and ICOs are used by companies to raise funds. The main (and very important) difference is regulation. Public companies are regulated by the Securities and Exchange Commission and have a series of legal requirements and formal processes. ICOs, on the other hand, are currently unregulated and exist in a wild "Wild West" territory.

Overall, there seems to be a lot of confusion and uncertainty regarding ICOs. Some believe that ICOs have turned into a "peculiar and unsustainable Keynesian beauty contest (speculative behavior)." Supporters are optimistic, claiming that ICOs represent a new form of venture capital.

The viewpoints on both sides differ, and most of us are left in the dark.

An example of a protocol is the TCP (Transmission Control Protocol) used in telecommunications, which is a set of rules for exchanging messages at the packet level over the internet. TCP ensures that packets will be delivered and that they will be transmitted in the same order they were sent. Another example of a protocol is the Internet Protocol (IP), which is a set of rules for sending and receiving messages at internet addresses, primarily specifying the format of packets and addressing schemes on the internet.

In discussions about blockchain, the term "protocol" refers to the "cryptoeconomic rules" implemented through the blockchain to maintain distributed consistency within the blockchain's peer-to-peer network.

Cryptoeconomic rules are the rules governing the decentralized digital economy:

(1) Authentication using public key cryptography

(2) Ensuring compliance with rules through economic incentives

For example, in Bitcoin's blockchain, miners verify each Bitcoin transaction, providing economic incentives that, in turn, protect the network.

What are these financial incentives?

Tokens

The economic incentives for miners come from the tokens above the Bitcoin blockchain — Bitcoin. Miners use computational power to verify transactions and receive a certain amount of Bitcoin.

Generally speaking, when you hear the term "cryptocurrency tokens" or simply "tokens," it refers to tokens like Bitcoin that are built on top of a blockchain and represent digital assets that you own and can transfer to others.

There are various ways to create tokens on a blockchain. For example, the most straightforward is intrinsic tokens like Bitcoin, which are directly built on the Bitcoin blockchain. You can also choose to fork the Bitcoin blockchain and create new tokens like ZCash, Litecoin, Monero, etc. Alternatively, you can build an entirely new blockchain technology and create tokens on top of it, like Ethereum, where the tokens on the Ethereum blockchain are "Ether."

… You can even create tokens on the Ethereum blockchain, with Gnosis (GNO) and Augur (REP) as examples. This may be confusing because "Ether" is the intrinsic token built on the Ethereum blockchain. I will explain this later. You just need to understand that it is possible to create other tokens outside of the Ether blockchain.

Drawing an analogy between tokens and traditional currencies can help you understand; you can view tokens as the currency itself (e.g., USD, EUR), while the blockchain protocol serves as the monetary policy.

The main point here is that each token is based on some underlying blockchain — whether it be the Bitcoin blockchain, Ethereum blockchain, or other forks/new blockchains.

Regardless of the cryptocurrencies involved, tokens are valuable because the blockchain provides an immutable, decentralized, and non-falsifiable backbone for asset operations.

Understanding Bitcoin and the underlying blockchain. We also understand the protocols that determine blockchain rules and the tokens built upon them. These technologies have prompted us to rethink our definition of money as something digital, easily transferable, secure, and decentralized.

But an important point is that currency is just one application of blockchain. Beyond currency, the real allure of blockchain lies in its potential future for (1) protocols and (2) applications.

(1) Protocols

The ultimate dream of cryptocurrency developers is to leverage blockchain technology to build new and improved communication protocols from scratch. The protocols being developed for cryptocurrencies have the potential to address the centralization issues plaguing the internet.

What are some examples of such protocols?

They include payment protocols, identity, domain name systems, cloud computing, reputation systems, and more. Many of these systems today are highly centralized (e.g., Stripe, PayPal, Google, Amazon), and there is no default or standard on the network.

Therefore, in the long run, we hope that blockchain technology can bring decentralized, open, and secure protocols to build use cases beyond cryptocurrencies.

(2) Applications

Blockchain can bring about "decentralized applications."

Decentralized applications or "dApps" are applications built on top of a blockchain. How do they work?

Let's take the Bitcoin blockchain as an example. Bitcoin uses a scripting system to conduct transactions on the Bitcoin blockchain. A script is a simple list of instructions. Thus, Bitcoin's scripting language allows us to write a script for each transaction record. The purpose of the script is to define the requirements that the recipient must meet to access the Bitcoin being transferred.

For a typical Bitcoin transfer, the script will define what the spender must provide:

1. A hash that matches the public key of the target address included in the script.

2. A signature that proves the private key corresponding to the just provided public key.

However, there is some flexibility in the parameters that transactions can send. For example, we can write a script that says, "this transaction is only valid with two private keys." Essentially, this scripting language now allows us to encode the rules for moving funds or, more generally, the rules for encoding any information without needing to trust a third party to follow a set of rules. We only need to trust the code.

Because Bitcoin has this scripting language, it can be used to build certain types of applications that interact on the blockchain. In other words, we can build applications that communicate using Bitcoin transactions.

For instance, suppose we want to build a blockchain-based crowdfunding application. You might have a set of rules about how to transfer (or convey) funds from one party to another, encoded through the scripting language. Then users of the application can operate a crowdfunding project controlled by the blockchain.

This is the main idea behind dApps: defining a set of decentralized rules for a specific application. This set of rules resides on a public and decentralized blockchain (rather than a central server owned by a large corporation like Facebook or Amazon). This allows it to be bound by autonomy and resist censorship.

Ethereum is a cryptocurrency launched in 2015, built on blockchain technology. It is designed as a broader protocol than the Bitcoin blockchain, not just for creating and recording native tokens within the blockchain network.

As stated in the Ethereum white paper:

"The purpose of Ethereum is to create an alternative protocol for decentralized applications, providing a different set of trade-offs that we believe will be very useful for large distributed applications, particularly emphasizing rapid development time, security for small and rarely used applications, and the ability for different applications to effectively interact. This is important. Ethereum achieves this by building what is essentially the ultimate abstract foundational layer: a blockchain with a built-in Turing-complete programming language that allows anyone to write smart contracts and distributed applications, where these applications can create their own ownership and arbitrary rules for transaction formats."

Essentially, Ethereum is just a transaction-based state machine: we start from an "initial state" and gradually execute transactions, transforming it into a final state. The final state is the normative version we accept as the current state of the Ethereum world.

Bitcoin is the intrinsic token of the Bitcoin blockchain, while Ether is the intrinsic token of the Ethereum blockchain.

Like Bitcoin, the Ethereum blockchain contains a log of events similar to transaction events. Users send Ether to each other using "logs," incentivizing miners to verify and protect these transactions within the network.

But it doesn't stop there; it can fill more types of event information from any type of computer program.

Let's look at the core concepts of the basics to understand why this is possible:

Basic Elements of Ethereum

First are accounts. There are two types of accounts: external accounts (EOAs) and contract accounts. Both types of accounts have Ether balances.

The main difference is that contract accounts have some associated code, while external accounts do not. Therefore, contract accounts can perform any type of computation when executing the associated code.

Next are transactions, which are cryptographically signed data packets used to store messages sent from an externally owned account to another account on the blockchain. When a transaction is sent to a contract account, the code associated with that contract account is executed by the "Ethereum Virtual Machine (EVM)" on each node.

Finally, there are messages. Messages allow contract accounts to call each other. When a contract account sends a message to another contract account, the code associated with that account is activated. Essentially, messages are like transactions, except they are generated by contract accounts rather than external accounts.

Why is building smart contracts important?

Protocols

The beauty of being able to easily build smart contracts on Ethereum is that it allows anyone to easily establish new protocols on top of Ethereum. Remember, a protocol is just a set of rules that network nodes use when transmitting information. Smart contracts allow us to do this: create a set of automatically trusted rules between two or more parties.

So essentially, there are two types of protocols:

1. Those with associated intrinsic tokens for economic incentives.

2. Those without tokens to drive economic incentives, used solely for communication protocols between nodes (Note: these types of protocols can still have associated tokens — for example, representing membership in the network, shared markets when open, etc. The difference is that they are not used to drive any economic incentives.)

For lack of a better name, I will refer to the first type as "cryptocurrency token protocols" and the second type as "cryptographic protocols."

Tokens

Just as Ethereum can build new protocols, it can also use smart contracts to create new tokens on its blockchain. We can refer to this type of token as "non-intrinsic tokens."

In this regard, broadly speaking, we can view a token system as a database with a single operation: subtract X units from A and allocate X units to B, provided that:

(i) A has at least X units before the transaction.

(ii) The transaction is approved by A.

Ethereum makes it particularly easy to implement such a token system. More specifically, the ERC20 token interface provides a standardized way to develop tokens compatible with the existing Ethereum ecosystem (such as development tools, wallets, and exchanges).

Additionally, these non-intrinsic tokens can exist in:

Independent tokens built on Ethereum (as shown in the above image).

Associated with any new underlying cryptocurrency token protocol built on Ethereum.

Associated with any new underlying cryptographic protocol built on Ethereum.

Token Sales (ICO)#

Launching a new cryptocurrency blockchain is not easy and requires a lot of groundwork to assemble the necessary resources for implementation and operation. However, in the case of Ethereum, its intrinsic tokens were used to elevate its blockchain — to kickstart a large network of developers, miners, investors, and other stakeholders, Ethereum created some Ether and launched a presale of these tokens to the public, using the funds to develop its blockchain.

Ethereum was not the first to do this. In 2013, when Ripple began developing the Ripple payment system, it created approximately 100 billion XRP tokens and sold these tokens to fund the development of the Ripple platform.

The concept of raising funds through token sales is sometimes referred to as an Initial Coin Offering or ICO. However, the structure of tokens can vary greatly (as we just saw in the previous section), and the term "ICO" makes it sound more official, seemingly increasing the perceived security of the investment, so let's continue using the term "token sale."

A token sale occurs when a party offers some new cryptocurrency (i.e., tokens) to investors at a certain price, which can be exchanged for other cryptocurrencies (i.e., tokens). The idea is that investors purchase these tokens, which can be exchanged and transferred.

While most token sales in the past were limited to building new cryptocurrencies (like Ethereum, Ripple, etc.), Ethereum's smart contracts are enabling startups to also use token sales to fund the development of various protocols and applications based on existing blockchains.

First, clarify the distinction between applications and protocols.

Applications vs. Protocols

Applications can be built on one or more protocols. An example is Augur, a decentralized prediction market application built on two protocols:

• A decentralized oracle protocol

• An exchange protocol

The decentralized oracle protocol is a "cryptocurrency token protocol" that has financial incentives to facilitate consensus on the outcomes of real-world events using Augur's token (REP). On the other hand, the exchange protocol is a "cryptographic protocol" that does not have an associated token to drive financial incentives but defines a set of rules for transferring tokens between buyers and sellers.

However, these protocols do not need to be tied to a single application. In theory, any application can be built on these underlying protocols.

Token Sale Protocol vs. Application

Previously, I mentioned how token sales can drive the development of new protocols and/or new applications.

So essentially, a team can use a token sale to fund the following projects:

• Blockchains (e.g., Ripple)

• Cryptocurrency token protocols built on existing blockchains

• Cryptographic protocols built on existing blockchains

• Applications built on cryptographic protocols

• Applications built on cryptocurrency token protocols

• Applications based on cryptographic protocols and non-cryptographic token protocols,

• Applications

Basically, this encompasses everything.

The last point is interesting because to conduct a token sale, an application does not even need to be built on a protocol. I could establish a non-profit organization and use tokens as a mechanism to fund projects. In this sense, token sales are simply a new way of financing traditional applications.

So what happens after investors buy these tokens?

It depends. When tokens are tied to cryptocurrency token protocols, they resemble intrinsic tokens like Ether and Bitcoin, used to drive the development of the protocol and network. But in cases where they are not intrinsic tokens, the tokens merely represent something more general. In fact, the flexibility of these tokens is sufficient to represent many different things.

For example, suppose I want to build a decentralized storage service. I could use smart contracts to construct a storage protocol that defines the price for storing what data between storage providers and clients.

Then, I would build a token for this protocol and conduct a token sale. If the protocol gains widespread use, it becomes more valuable, which in turn can increase the value of the token. Additionally, as the developer of this service, I could choose to allow the token to represent the right to purchase the services provided.

It is important to note that, generally speaking, the mechanisms for creating tokens are very flexible, and tokens can represent many different things:

• Credit/membership in decentralized applications

• Rights to a portion of profits/losses \ assets/liabilities

• Ownership or equity in a protocol (or project)

• Company voting rights

• No other function, just a digital asset that can be freely traded in cryptocurrency

• And so on

Some projects have successfully raised funds through token sales, including Augur, Antshares, Melonport, Gnosis, Antshare, Gnosis, and more.

At this juncture, Ethereum not only allows us to easily provide protocols for building decentralized applications but also facilitates the formation of networks. Ethereum achieves this in two ways:

1. Funding

This is obvious. As we have seen, token sales enable developers to easily issue tradable tokens to raise funds for building protocols and/or applications. With this money, teams can choose to invest in sales, marketing, etc., to drive the network.

2. Users

This is the more interesting part. Protocols and decentralized applications can use token sales as a mechanism to acquire early contributors and adopters, addressing the network effect issue. Early adopters of a protocol or application have the incentive to purchase tokens because they may appreciate in value in the future. So essentially, tokens can help guide early users.

Suppose you want to build a new file-sharing protocol. You could acquire some early adopters, investors, and entrepreneurs interested in "buying in" by selling tokens. They might be speculating or genuinely believing in the product. At this point, they become stakeholders in the protocol itself and invest economically. Then, some of these early adopters may become users of products built on the protocol or build products and services around the protocol, further encouraging the success of the protocol to increase the value of its tokens. As the protocol gains adoption, it increases the value of the tokens, which further attracts more investors, application builders, and users, leading to more applications, and so on.

Ethereum has established a very flexible system for innovation at both the protocol and application levels. In the coming years, we may see a plethora of experiments and innovative protocols and applications. Many of these will fail, just like many startups do. But over time, some core protocols and related networks may achieve mainstream adoption.

Finally, once protocols begin to form and standardize, we will see a plethora of decentralized applications being built.

On one hand, finding early adopters is not enough. You also need to work hard to maintain the growth of network effects, just like traditional businesses. This means years of effort to build useful applications and drive user growth.

Secondly, another trend I have noticed is that most of the token sales we see today are used to drive network effects around specific applications rather than open and decentralized protocols. Because tokens are very flexible, dApp developers are creating tokens coupled to dApps rather than standardized underlying protocols that can be shared across applications. This could lead to fragmentation of protocols.

Thirdly, the initial growth in token value is primarily due to speculation (as it takes time for the established platform to generate value). Therefore, there is likely to be significant volatility. It is currently unclear how we can mitigate this, and if we can find a mechanism to stabilize token prices over time. Overall, there are many open questions regarding the viability of token value over time. Ideally, we want to associate the value of tokens with the value of the protocol or application, similar to the relationship between the stock of a public company and the stock of the issuing company, or representing some valuable digital rights. But as of today, the value of these tokens still primarily stems from speculation.

Fourthly, there is currently an incredible bubble in the token sale market. Due to the difficulty of classifying them as equity sales (which are unregistered securities) under securities regulations (remember, tokens can represent anything, including equity in a protocol or application), developers do not do so. Instead, they treat it as crowdfunding. While some projects have raised the necessary capital in this way while avoiding regulatory hassles, long-tail projects are simply leveraging the high demand in the ICO market to raise millions of dollars in capital, some of which are outright scams. We hope these crowds can gather to build common good rather than deceive. How can we achieve this?

In addition to these issues, there are many questions that need to be addressed before token sales become a viable form of funding:

• What is the correct design and structure for token sales?

• Under what circumstances can tokens be considered a safe investment? How should token sales be regulated?

• What criteria should individual investors use to evaluate token sales? (Team, business model, etc.)

• How can investors ensure that the sales process is managed in a safe and legal manner?

• Is there a need for a mechanism to allocate a portion of the company's liquidation value among the company's holders? Dividends?

• Can token holders exert control over the protocol or application through voting rights?

• After raising funds, how should the money be spent?

• What metrics can investors use to assess the trustworthiness of the team building the protocol or application based on long-term plans and visions?

• Is it more efficient to transfer the smart contracts of tokens directly to use Ethereum rather than creating a new token for each protocol?

• What impact does this have on investors' profits and losses?

• If sales tokens become a new way for startups to raise funds, what will traditional venture capitalists do?

Token economics encompasses various factors that influence the value of cryptocurrencies. This term primarily refers to the economic structure of the cryptocurrency designed by its founders. Below are some key elements to consider when studying the token economics of cryptocurrencies.

Token Supply#

For any goods and services, supply and demand are the main factors influencing price. The same applies to cryptocurrencies. Here are some key metrics for measuring token supply.

The first is maximum supply, which is the upper limit on the number of tokens specified by preset code. The maximum supply of Bitcoin is 21 million. Litecoin has a hard cap of 84 million, and Binance Coin has a maximum supply of 200 million.

Some tokens have no supply cap. The supply of Ether on the Ethereum network increases every year. Stablecoins like USDT, USDC, and BUSD do not have a maximum supply because these coins are issued based on supported reserves. Theoretically, the supply of these coins can continue to increase. Dogecoin and Polkadot are two other cryptocurrencies without a supply cap.

The second metric is circulating supply, which refers to the number of tokens in circulation. Tokens can be minted and burned or otherwise locked. This also affects the price of the token.

By examining token supply, you can get a rough idea of how many tokens will ultimately be generated.

Token Utility#

Token utility refers to the established use of a token. For example, the utility of Binance Coin includes powering the BNB chain, paying transaction fees on the BNB chain, enjoying transaction fee discounts, and serving as a community utility token on the BNB chain. Users can also stake Binance Coin through various products within the ecosystem to earn additional income.

Tokens have many other use cases. Holders of governance tokens have the right to vote on changes to the token protocol. Stablecoins can be used as currency, while security tokens represent financial assets. For example, a company can issue tokenized stocks during an Initial Coin Offering (ICO), granting holders ownership and dividends.

These can help you determine the potential use cases of a token, which is crucial for understanding its future direction.

Analyzing Token Distribution#

In addition to supply and demand, it is also essential to understand how tokens are distributed. Large institutions and individual investors behave differently. Once you understand the types of entities holding tokens, you can further infer how holders might trade, and their trading behavior will influence the token's value.

Generally, there are two ways to launch and distribute tokens: fair launch and pre-mined launch. Fair launch means that no one gets a head start or small-scale distribution before the tokens are minted and distributed to the public. Bitcoin and Dogecoin both adopted this launch method.

The second method involves pre-mining, which means that a portion of the cryptocurrency is minted and distributed to a specific group before being made available to the public. Ethereum and Binance Coin underwent pre-mining.

Generally, you need to pay attention to whether the token distribution is even. Typically, if a few large institutions hold the vast majority of tokens, it poses a higher risk. If patient investors and the founding team hold the majority of tokens, the interests of the holders will be more aligned, increasing the likelihood of long-term success.

You should also consider the token's lock-up and release schedule to see if a large number of tokens will enter circulation, potentially putting downward pressure on the token's value.

Understanding Token Burn#

Many crypto projects regularly burn tokens, meaning that some tokens permanently exit circulation.

For example, Binance Coin employs a token burn mechanism to remove some tokens from circulation, thereby reducing the total supply. The pre-mined amount of Binance Coin was 200 million. As of June 2022, the total supply of Binance Coin was 165,116,760. A significant amount of Binance Coin will continue to be burned until the remaining amount is 50% of the initial total supply. This means the total supply of BNB will be reduced to 100 million. Similarly, Ethereum also began burning Ether in 2021 to reduce its total supply.

Reducing token supply is deflationary. In contrast, continuously expanding token supply is inflationary.

Incentive Mechanisms#

The incentive mechanism of tokens is crucial. How to incentivize participants to ensure long-term sustainable development is the core issue of token economics. The block subsidy and transaction fee design in Bitcoin serve as a model of simplicity.

Proof of Stake mechanism is another increasingly common validation method. Under this design, participants need to lock tokens to validate transactions. Generally, the more tokens locked, the greater the chance of being selected as a validator and receiving rewards for validating transactions. This also means that if validators attempt to compromise the network, their own assets will be at risk. These settings incentivize participants to act honestly, maintaining the robustness of the protocol.

Many DeFi projects leverage innovative incentive mechanisms to achieve rapid growth. On the cryptocurrency lending platform Compound, investors can deposit cryptocurrencies into the Compound protocol, earn interest, and receive COMP tokens as additional rewards. Moreover, COMP tokens also serve as governance tokens for the Compound protocol. These designs align the interests of Compound with all participants, benefiting the project's long-term development.

The issuance of tokens in blockchain projects serves four purposes:

First, to crowdfund development funds.

Second, to incentivize system participants.

Third, to price assets.

Fourth, to mark assets.

In addition to these four functions, tokens also possess two major mechanism attributes: one is resource coins with exchange value; the other is asset coins with utility value.

So, considering the functions and values of tokens, let's see what conditions are needed to create a non-coin blockchain project:

First, if issuing tokens is for crowdfunding, solving development costs, that's simple; just find someone to fund it. Now, major internet giants are stepping in, publicly sharing various blockchain project information, isn't it because they have money? (Indeed);

Second, if issuing coins is to incentivize system participants, this depends on the system. Generally, pure public chain systems are decentralized and open-source, and indeed require incentives for participants. This is a certainty that cannot be avoided, so as long as it is not a public chain, there is no need to issue coins; consortium chains, private chains, or technical upgrades can be considered without this issue.

Third, if issuing tokens is for pricing assets (goods), this scenario typically involves platform trading needs. For example, when redeeming points, the universal points that need to be anchored require the system to issue a previously non-existent virtual asset.

But this is not absolute; pricing can also be done directly with fiat currency or using specific points rather than tokens. Aren't various e-commerce platforms and internet applications using fiat currency for asset pricing? So to some extent, this can also be disregarded.

Fourth, if issuing tokens is to mark assets, this is indeed a core feature of blockchain. Any tangible or digital asset on-chain is marked by having its own token, which is the value of blockchain in realizing digital asset rights.

1. Consortium chains do not need to issue coins: For example, in the financial system's consortium chain, they use blockchain technology to solve the clearing and settlement issues within the entire product system. Everyone contributes, and everyone keeps the accounts. In reality, this cost is negligible compared to the savings achieved. It is said that the annual interbank settlement costs worldwide amount to $20 billion, and using blockchain technology can reduce costs by at least 50%. Moreover, this task is done collaboratively by various banks, whose credibility is sufficiently high, making a completely decentralized platform unnecessary.

2. Private chains do not need to issue coins: Private chains are usually a way to empower enterprise products and can be directly monetized, such as electronic contracts and electronic transaction information storage services. Developers only need to collaborate with regulatory authorities for bookkeeping, charging a fee for each storage service, which is a good business. Additionally, luxury goods anti-counterfeiting traceability can reduce the cost of counterfeiting through blockchain, which is very cost-effective for major brands like LV.

3. Internal system security upgrades in enterprises do not need to issue coins: This is even easier to understand. Daily inspections, audits, budget management, and permanent data storage in enterprises can all be solved using blockchain, without the need to issue tokens.

Finally, we must also consider the issue of token value realization. Regardless of whether it is called a token or a Token, its underlying value function is fundamental. Many people debate whether digital currencies have value; this debate is actually a manifestation of a lack of understanding. The essence of value is human perception. The value of any entity is not fixed; the perceived value of the same entity can vary among different people. When value is expressed through price, many people cannot accept it.

You might say that someone spending tens of thousands on a broken bowl is insane, but you cannot claim that the bowl has no value because you have no evidence to prove it lacks value, while the person buying the bowl can prove it has value. Value includes both utility value and exchange value; at this point, you are observing exchange value.

The value of tokens is the same; whether it is Bitcoin or Ethereum, their prices reflect exchange value. When will we see the manifestation of the utility value of blockchain tokens? This is our expectation for blockchain implementation. When the usage rights of a self-driving car or the playback rights of a piece of music are marked as digital assets with tokens, the value of these tokens will manifest as utility value.

In fact, the concept of tokens has always been difficult to understand because we have not seriously considered its underlying meaning. Based on the current stage of blockchain technology development, we can see two major classifications of tokens, which I refer to as resource coins and asset coins.

What are resource coins? This resource is analogous to natural resources in nature, such as air, water, land, and minerals, which exist on Earth and originally do not belong to anyone. These are natural resources. What use do they have? Without human development, they are of no use to people. If blockchain is building a new digital world, then Bitcoin, Ethereum, and other seemingly useless things are actually resources of the digital world.

The development method of homogeneous tokens determines that each token is the same. A homogeneous token can be exchanged with any other similar token. These tokens are identical, so homogeneous tokens are interchangeable.

In fact, "homogeneity" is the essential distinction of cryptocurrencies; most cryptocurrencies are homogeneous. For example, Bitcoin and Ether are homogeneous. One Bitcoin (or a part of it) can be exchanged for another token because they represent the same value. The same goes for Ether.

Homogeneous tokens are divisible and not unique. Additionally, homogeneous tokens simplify the exchange and trading process because "homogeneity" means different tokens have the same value. In the cryptocurrency realm, most homogeneous tokens are issued using the ERC-20 standard on the Ethereum blockchain.

At first, it may be difficult to understand the difference between homogeneous and non-homogeneous, but it is actually very simple. Homogeneity means interchangeability. Therefore, identical homogeneous items have the same value. They can be exchanged, thus possessing interchangeability.

The simplest example is dollar currency. If someone owes you $1, you know they will pay you back $1, but not necessarily the same dollar bill. You would accept any kind of dollar, say four 25-cent coins, because you want the value of the dollar, not the specific dollar bill. In other words, dollars are homogeneous. That is to say, "homogeneity" refers to an asset's ability to be exchanged with other similar assets. For example, commodities like oil or gold bars are homogeneous assets.

In contrast, non-homogeneous assets cannot be exchanged. Each non-homogeneous asset is unique and has a different value from any other asset.

Non-homogeneous assets are generally collectibles, but not exclusively. For instance, a car is a non-homogeneous commodity. If you send your car for repairs and the shop gives you another car in better condition to use temporarily, you would be pleased. If the car's condition is worse than your own, you would be unhappy. But the value of that car is different from yours, making it a non-homogeneous commodity.

Another example is when your grandfather gifts you an old watch. From an emotional perspective, no other watch in the world has the same value as this one. Or if you create a piece of art that is very special to you, no other item can have the same value, making this artwork non-homogeneous.