Original Title: Defining tokens

Original Authors: Miles Jennings, Scott Duke Kominers, Eddy Lazzarin

Original Translation: DeepTide TechFlow

As activity and innovation in token-based network models continue to grow, builders are eager to understand how to differentiate between various types of tokens—and which token might be the best fit for their business. Meanwhile, consumers and policymakers alike are striving to better grasp the role and risks of blockchain tokens in applications.

To aid in organizing this conversation, we offer definitions, examples, and frameworks to help you understand the seven most commonly used types of tokens by entrepreneurs: network tokens, security tokens, corporate-backed tokens, utility tokens, collectible tokens, asset-backed tokens, and Memecoins. We outline them in more detail below.

Quick Review: Tokens and Their Characteristics

At its core, tokens enable true digital ownership.

More precisely, the blockchain is a decentralized computer made up of individual computers maintaining a shared ledger—an "airborne computer," if you will. Tokens are data records on these ledgers that can track quantity, permissions, and other metadata. Crucially, these data records can only be altered according to rules encoded on the blockchain, which can be used to grant actionable rights.

Beneath this precision lie many details that impact design, function, value, and risk: because tokens are embedded in software, they can be programmable to represent nearly anything—any digital form or asset record. This means tokens can be designed as digital value stores like Bitcoin, productive and consumable assets like Ethereum, collectibles like digital trading cards and in-game items, payment stablecoins like USDC, or even tokenized stocks.

Some tokens grant holders various rights (such as voting or economic rights), while others merely allow access to a product or network service. Some tokens can be transferred between users, while others cannot. Some tokens are fungible, meaning all units are equivalent (like dollar bills), while others are non-fungible, representing unique personal assets (one-of-a-kind, such as trading cards, or even the Mona Lisa).

These design choices are critical as they determine whether a token serves as a good value store or medium of exchange; if it is a productive asset with intrinsic functionality and/or economic value; or if it is fundamentally worthless. The specific characteristics of a token also dictate how it will be treated under applicable law.

Therefore, whether you are looking to build a blockchain-based project, invest in tokens, or simply use tokens as a consumer, understanding what to look for is crucial. It is important not to confuse Memecoin with network tokens. The rest of this article aims to help eliminate this confusion.

Token Types

Network Tokens

Network tokens are essentially linked to the programmatic functionality of a blockchain or smart contract protocol, and their value derives from this.

Network tokens often have built-in utility; they can be used for network operations, consensus reaching, coordinating protocol upgrades, or incentivizing network actions. The networks associated with these tokens usually (in most cases should) contain economic mechanisms that drive token value. These include programmatic buybacks, dividends, and other changes to the token's total supply through token issuance ("faucet") or destruction ("sink") to introduce inflationary and deflationary pressures to serve the network.

Network tokens can have trust dependencies similar to commodities and securities. Recognizing this, the SEC's 2019 framework and FIT21 both specify that when these trust dependencies are mitigated through decentralization of the underlying network, network tokens will fall outside of U.S. securities laws. The core essence of decentralization is that the system can operate without human control (individuals, companies, or management teams).

Network tokens are best suited for guiding the creation of new networks, distributing ownership or control of the network to its users, and/or ensuring the network can self-fund for sustained and secure operations. Examples of network tokens include DOGE, BTC for Bitcoin, ETH for Ethereum, SOL for Solana, and UNI for Uniswap. In the context of smart contract protocols like Uniswap and Aave, network tokens are sometimes also referred to as "protocol tokens" or "application tokens".

Security Tokens

Security tokens represent the digital form of securities, which can be in traditional forms (such as company stocks or corporate bonds) or have unique features like profit interests in a limited liability company, shares of an athlete's future income, or even securitization rights to future lawsuit settlements.

Securities typically grant holders certain rights, ownership, or interests, and their issuers usually have unilateral power to affect or construct the asset's risk. As the U.S. Securities and Exchange Commission looks to modernize securities laws to allow for on-chain trading, the number and types of tokenized securities may increase, potentially enhancing the efficiency and liquidity of the securities market. But even as the categories expand, digital securities will remain subject to U.S. securities laws.

Security tokens have been used to raise funds for businesses. Examples of security tokens include Etherfuse Stablebonds and Aspen Coin, the latter representing partial ownership of the Aspen Regis Resort.

Company-Backed Tokens

Company-backed tokens are intrinsically linked to a company's (or another centralized entity's) off-chain application, product, or service and derive value from it.

Similar to utility tokens, company-backed tokens may leverage blockchain and smart contracts (for example, to facilitate payments). However, as they are primarily associated with off-chain operations rather than network ownership, companies can unilaterally control their issuance, utility, and value. Like utility tokens, company-backed tokens often have their own embedded utility. Unlike utility tokens, company-backed tokens have speculative value.

Given these characteristics—although company-backed tokens do not confer explicit rights, ownership, or interests to holders akin to traditional securities—they entail a trust dependency similar to securities: their value inherently depends on systems controlled by individuals, companies, or management teams. Therefore, while company-backed tokens themselves are not securities, their trading may fall under the purview of U.S. securities laws when investments are attracted to company-backed tokens.

Company-backed tokens may straddle a regulatory gray area. However, in U.S. history, they have primarily been employed for illicitly sidestepping securities laws—soliciting investments in applications, products, or services under company control that may act as proxies for the company's equity or profit interests. Examples of company-backed tokens include FTT, representing a profit interest in the FTX exchange, or hypothetical cloud service providers issuing tokens that grant access to cloud services and a share of on-chain revenue from such services. Concurrently, BNB stands as an example of a company-backed token that evolved into a network token with the launch of the Binance Smart Chain. Company-backed tokens are sometimes referred to as "startup tokens" or, given their linkage to off-chain applications, as "app tokens."

For more information on the distinction between network tokens and company-backed tokens (including FTT), please refer to "Network Tokens vs. Company-Backed Tokens."

Utility Tokens

Utility tokens provide functionality within a system and are not intended for investment purposes. They are typically used as currency in digital economies, such as in-game digital gold, loyalty points in membership programs, or points redeemable for digital products and services.

It is important to note that utility tokens are different from security tokens, network tokens, and company-backed tokens as they are specifically designed to deter speculation. For example, these tokens may not have a supply cap (meaning an infinite amount can be minted) and/or limited transferability; they may expire or devalue if unused, or they may only have monetary value and utility within the system that issues them. Most importantly, they do not offer, promise, or imply financial returns. Given their unsuitability as investment products, utility tokens are typically not subject to U.S. securities laws.

Utility tokens are best suited as a currency in the digital economy, where the issuer gains economic benefit by controlling the currency policy of that digital economy (acting as a central bank) and maintaining a stable token value, rather than benefiting from token value appreciation. Examples include FLY, a loyalty and payment token of the Blackbird restaurant network. Another example is Pocketful of Quarters, a in-game asset that did not receive action relief from the U.S. Securities and Exchange Commission in 2019. Robux and Start Alliance Points have not been tokenized yet, but they otherwise embody the concept of utility tokens well. Utility tokens are sometimes also referred to as “useful tokens,” “loyalty tokens,” or “points.”

Collectible Tokens

The value, utility, or meaning of collectible tokens is derived from the record of ownership of tangible or intangible goods. For example, collectible tokens can be digital replicas or representations of artworks, musical works, or literary works; memorabilia or commodities like concert tickets; memberships to clubs or communities; or assets in games or metaverses, such as digital swords or plots of metaverse land.

These tokens are often non-fungible and typically have utility. For example, collectible tokens can serve as event permits or tickets; be used in video games (such as that sword); or provide ownership related to intellectual property . Since collectible tokens are usually associated with finished products or goods and do not rely on the efforts of a third party, they are generally not subject to U.S. securities laws.

Collectible tokens are best suited for conveying ownership of tangible or intangible goods. Many (though not all) “NFT” products fall into this category. Examples include NFTs conveying ownership of digital art or other media; individual profile pictures (“pfps”) like CryptoPunks and Bored Apes, as well as other virtual fashion and brand goods; in-game items; and account records or identifiers (such as ENS domains).

Some collectible tokens are directly linked to physical products, either providing a digital extension of the physical product experience, such as Pudgy Penguins toys and Generative Goods collectible cards; or providing a digital representation of a physical item for tracking and/or exchange, such as NFT event tickets and BAXUS' insurance-linked NFTs for alcoholic beverages.

Asset-Backed Tokens

The value of asset-backed tokens derives from a claim or exposure to one or multiple underlying assets. These underlying assets can include real-world assets (e.g., commodities, fiat currency, or securities) or digital assets (e.g., cryptocurrencies or liquidity pool shares).

Asset-backed tokens can be fully or partially collateralized and serve various purposes: as a store of value, hedging tool, or on-chain financial primitive. Unlike collectible tokens that derive value from ownership of unique items (such as digital artwork, in-game items, or event tickets), asset-backed tokens function more like financial instruments, deriving value from their collateral, price pegging mechanism, or redemption rights. However, the regulatory treatment of asset-backed tokens depends on their structure and use case. Some tokens, like fiat-backed stablecoins, are typically not subject to U.S. securities laws. Other tokens, such as certain derivative tokens, may be subject to securities or commodities regulations if they represent investment contracts or similar futures-like instruments.

Asset-backed tokens have many use cases, including:

· Stablecoins, pegged to a currency or asset;

· Derivative tokens, providing synthetic exposure to underlying assets or financial positions;

· Liquidity Provider (LP) tokens, representing claims on assets pooled in decentralized finance (DeFi) protocols;

· Depositary Receipt tokens, representing staked or custodied assets.

Examples include USDC (a fiat-backed stablecoin), Compound's C token (an LP token), Lido's stETH (a liquidity staking token), and OPYN's Squeeth (a derivative token tracking ETH's price).

Memecoins

A memecoin is a token with no intrinsic utility or value, usually associated with internet memes or community-driven movements and not fundamentally tied to a network, company, or application.

The price of a Memecoin is entirely driven by speculation and related market forces, making it highly susceptible to manipulation. Its key features include a lack of inherent purpose (if it has a purpose, it ceases to be a Memecoin), lack of utility, and the resulting zero-sum nature and volatility. Memecoins are typically not constrained by U.S. securities laws but are still subject to anti-fraud and market manipulation laws.

For example, PEPE, SHIB, and TRUMP.

Not all tokens neatly fit into one of these categories—entrepreneurs regularly iterate and experiment with new models. For instance, if social and reputation tokens are non-investable, they might be more akin to utility tokens, or if they are controlled by a centralized issuer, they may be more like company-backed tokens. As tokens evolve with changing features or the addition of new functionalities, they can transition from one category to another, making classification difficult.

But a defining characteristic for categorizing these tokens is the expected source of value accrual. A flowchart can help illustrate this:

(Note: The image is an AI translation and differs somewhat from the original text about token definitions.)

Acknowledgments: We would like to thank Chris Dixon, Tim Roughgarden, and Bill Hinman for their valuable comments; as well as Tim Sullivan for editing.

Miles Jennings is the General Counsel at a16z crypto, responsible for providing advice on decentralization, DAOs, governance, NFTs, and state and federal securities law for the firm and its portfolio companies.

Scott Duke Kominers is the Sarofim-Rock Professor of Business Administration at Harvard Business School, an Associate Professor in the Entrepreneurial Management Unit at Harvard University, and a research partner at a16z crypto. He advises multiple companies on web3 strategy, market, and incentive design. For further disclosures, refer to his website. He is also a co-author of "Everything as a Token: How NFTs and Web3 Will Transform What We Own, Sell, and Create."

Eddy Lazzarin is the Chief Technology Officer at a16z crypto. He oversees the engineering, research, and security teams that support the investment process and collaborate with portfolio companies to build the future of the internet.

Original Article Link

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia