Introduction to blockchain investment: Does this blockchain need to have a native token?

In my last post, I discussed the blockchain hype surrounding the financial industry. Now, let’s discuss the hype surrounding coins (or tokens), which is mainly reflected in the endless ICOs, speculation, and forks.

This article covers the following issues:

1. What are the current problems?

2. What are tokens in blockchain?

3. How to differentiate between real cryptocurrencies and scams?

4. What are people trying to achieve when they create tokens?

5. Which blockchains must have tokens?

What are the current problems?

Most people believe that tokens are necessary in a blockchain so that they can be incentivized to invest money in ICOs. But everything has its black and white sides.

Andreas once said:

“Blockchain is more than just currency. Yes, your understanding is correct. Blockchain without currency? No, your understanding of blockchain is wrong.”

Marc's comment:

“Big companies wanting to separate blockchain from Bitcoin is like what happened in 1994: Can we go online without the Internet?”

But in the following report, you will see another result:

“73% of financial professionals believe that blockchain does not need Bitcoin to thrive.”

This debate is somewhat misleading, and here are the reasons why:

1. Andreas used “blockchains” (plural), meaning he was not referring to any specific blockchain.

2. Marc could be referring to the Bitcoin blockchain, but one would infer that he means any blockchain.

3. Obviously, the Bitcoin blockchain cannot exist without Bitcoins, as the only thing it contains is information about Bitcoins :)

4. “Blockchain technology” and “Bitcoin” (Bitcoin with a capital B refers to the Bitcoin network, not the currency, while the lowercase b refers to Bitcoin the currency)

The first question is what kind of technology people understand as blockchain.

Blockchain, broadly defined, is a mechanism for reaching consensus on the state of a shared database between multiple untrusting parties.

I know many people have different descriptions. But if you ask “why” a few times, you will find the key features of blockchain protocol at the end of the investigation. Moreover, blockchain is not about currency, but about consensus of some digital assets. In this article, I describe which assets need to use blockchain.

What are tokens in blockchain?

To put it another way, what do people often refer to as cryptocurrency?

1. A truly decentralized cryptocurrency, like Bitcoin.

2. A crypto asset that is backed by something or someone (e.g. Ripple’s IOU)

3. A coin that has no value backing and was pre-mined by the creator (usually a scam)
   

What is the role of tokens in blockchain?

1. How founders get funding

2. Shares in blockchain startups

3. One accounting method, one digital asset

4. How miners are rewarded

5. A method to prevent double spending in PoS and PoW consensus mechanisms

6. A way for participants to make payments

7. Membership Fees

Reason #1 is clear, unfortunately it is often interpreted as "let's make money by hyping it up". Reason #2 is ok, but it is not a coin, but a share. Reason #3 is also ok, because you can use it for accounting of anything, even tomatoes in a warehouse, just making a coin for it is a bit weird.

What is the reason for creating a token?

Reasons #4-7 are a bit more complex. My guess is that the founders wanted to create an economy, and an economy requires control. Why do we have national currencies? To control the economy, through prices, inflation, subsidies for certain industries, competition control, etc. If there were no monetary politics, there would be no need for a currency. However, many blockchain projects have introduced a currency without introducing successful economic rules. Therefore, if you want to create a currency, or evaluate a currency, the first question is whether this new economy will be sustainable. The second question is which projects need to have a token, which is very important because the wrong answer can quickly disappoint the community, investors, and other key stakeholders.

Which blockchains need tokens?

To answer this question, we need to distinguish different kinds of blockchains. The model and reasoning for this process have been introduced in the previous article, and here are the results.

I really believe that only systems in the upper left quadrant might need to have tokens, for reasons #4-7, such as Bitcoin, Monero, etc. I say “might” because Bitmessage provides a very good example of a proof-of-work system consisting of anonymous nodes that doesn’t need to have a token, or even a shared blockchain.

Any PoS blockchain does not necessarily need a token. Instead, what they need is an ideal payment method (or currency) that everyone agrees on. I am not saying that such an ideal currency exists, but I think we are very close. I will describe the criteria for such an ideal currency in the next article.

FBA blockchains (Ripple, Stellar) do not need tokens at all. In this scenario, tokens neither increase the stability of the network nor effectively combat spam transactions. Validators do not need to pay fees under any circumstances. They can use any existing currency (Bitcoin, Ethereum, etc.) to perform settlements with the highest efficiency.

By default, private chains also do not need tokens. Although they can be based on a digital asset (representing legal currency), or some synthetic currency (for example, the SDR issued by the IMF). However, before such blockchains can become the main source of information about legal accounts, they must be backed by value.

Generally speaking, if the system does not manage scarce assets, it does not need to use blockchain. The best architecture for such a system is an open network, such as Tor, Torrent, Bitmessage, DHT, etc.

I think Ethereum, as a smart contract platform, probably doesn’t need a native token to exist (unless you define Ethereum as programmable money). The same applies to other projects like Storj, Waves, List, Maidsafe, Ripple, Factom, Filecoin, etc. It seems strange for consumers to buy another currency to pay for storage space. Why not just use Bitcoin?

in conclusion

There are few justifiable reasons to create a native token in a blockchain, the most important being the creation of a new economy. Therefore, before participating in an ICO, we need to consider whether we can use the same technology to solve the same problem without creating a new coin.