Recap
Last week, we explored token classifications based on :
Source
Usage
Based on source, tokens are classified into
a. Protocol Tokens
b. Application Tokens
Protocol tokens are issued as native or intrinsic tokens for a Blockchain to keep the network safe from external attacks & for transaction fee payment.
Application tokens are issued as part of a DApp (Decentralized app). So they can have any property or function depending on their use case. These tokens can represent either physical or digital goods, or a right to some product or service as part of the application.
These tokens are issued independently of the underlying Blockchain.
Based on usage, tokens are classified into
a. Utility Tokens
b. Equity Tokens
A utility token is a token that is given out during crowd sales as a project executes an ICO (Initial Coin Offering).
An Equity token represents a share in the underlying company.
Let us move on to other classifications.
Classification based on Fungibility
Tokens are classified based on fungibility as below :
Fungible Tokens
Non-Fungible Tokens
Before we move on to the above token types, let us first understand the term Fungible or Fungibility
Fungibility
In economics, fungibility is the property of a good or commodity whose individual units are essentially interchangeable, & each of whose parts are indistinguishable from any other part. (Source: here).
This means a good or commodity is fungible if it can be easily exchanged for the same type in single or multiple combinations. For example, fiat currencies are fungible - a $100 bill can be exchanged or replaced for twenty $5 bills or five $20 bills. These currencies are interchangeable & can be used in place of the other.
Photo by Alexander Schimmeck on Unsplash
Fungible Tokens
Fungible Tokens are cryptographic tokens that are identical, similar in nature & functionality. For example, one Bitcoin can be exchanged for one Bitcoin. It makes no difference to the holder. We can also exchange smaller amounts of one Bitcoin, measured in Satoshis like cents to a dollar.
Thus, fungible tokens are :
Identical - Tokens of the same type are identical to each other.
Interchangeable - A token can be exchanged for another similar token of the same value.
Divisible - Fungible tokens can be divided into smaller values. This means a fraction of a token can be used for any transaction.
Non-Fungible Tokens
Non-fungible tokens (NFTs) are cryptographic tokens that are unique & not similar to any other type of non-fungible tokens.
Thus Non-Fungible tokens are
Unique - Each token is different from the rest & has unique attributes
Non-Interchangeable - Such tokens cannot be replaced by other tokens as they represent something unique values or properties
Non-Divisible - Such tokens are not divisible as they represent a unique feature or value.
This unique nature of each NFT is used to authenticate ownership in digital assets like digital art, virtual real estate or digital pets. Crypto-kitties were among the first NFT collectibles & very popular. Each crypto kitty was unique & can be exchanged with another unique crypto kitty.
A real-life example of a non-fungible token is a concert ticket or a cinema ticket. Each ticket represents a specific date & seat. No other ticket will have those same parameters.
We will explore NFTs in more detail in the coming weeks as it is a huge topic on it's own.
Classification Based on Transferability
Tokens are classified based on transferability as below :
Transferable
Non - Transferable
Tokens can be transferable or non-transferable depending on their use case. They may also have restricted transferability.
Non - Transferable Tokens
Non - transferable tokens are also called "Soulbound tokens". These are tokens that are permanently tied to a particular individual or wallet. This means they cannot be transferred to anyone else.
A use case of a non-transferable token is an ID token that can be used for identifying an individual like a passport & cannot be transferred to anyone else. Another soulbound token is Binance Account Bound token. (BAB token)
The BAB token (which is a soulbound token) is used to address concerns around KYC requirements. It is used to verify that the account holder has undergone Binance's KYC process & can this token can be displayed in the wallets as proof of verification.
Classification Based on Token Flow
Based on the flow structure around which the token is designed, tokens are classified into :
Linear
Circular
Linear Tokens
Tokens that are created for a single purpose & destroyed when that purpose has been fulfilled are called Linear Tokens. Or such tokens may be destroyed after a particular expiry date. A concert or cinema ticket is a real-life example of linear tokens. It's use expires after the specific show it represents.
Circular Tokens
Tokens that can be exchanged back & forth indefinitely without any expiration date is said to have a circular flow. For example, currencies have a circular flow & this kind of economy is referred to a "Circular Flow Model" where money flows from producers to consumers & back again in an endless loop.
In an economy, money moves from Producers (Firms) to Workers (households) as wages & then from Workers to Producers as they spend money on goods & services.
The below visualization makes it clear:
In conclusion, tokens in the blockchain ecosystem can be classified in various ways, including by source, usage, fungibility, transferability, and token flow. Understanding these classifications helps in determining the purpose and functionality of different tokens, as well as their potential applications in various industries. As Blockchain technology continues to evolve, we can expect to see even more types and classifications of tokens, providing innovative solutions to real-world problems.
Next week, we will deep dive into Non-Fungible Tokens