What is a token and what is it for?

In the digital world, minting currencies is an activity that doesn’t seem to be restricted to central banks anymore.  Bitcoin is the best example of how, from a private environment, a blockchain-based virtual currency can be rolled out in the market, albeit subject to many limitations due to the lack of a legal framework to regulate it. But bitcoin was just the beginning of a fully-fledged revolution, the second step of which might very well be the tokens.

A token is actually nothing more than a new term to make reference to a unit of value issued by a private entity.   Although tokens bear many similarities with bitcoins (they have a value attached to them which is accepted by a community and are blockchain-based), they serve a much broader purpose. Tokens are more than a currency because they can be used in a broader range of applications. Also, virtually all tokens rely on Ethereum’s blockchain protocol, which, according to experts, is more complete than bitcoin’s blockchain.

According to William Mougayar, author of 'The business blockchain', a token is "a unit of value that an organization creates to self-govern its business model, and empower its users to interact with its products, while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders."

This is indeed a revolutionary concept. But, what are tokens good for?

Within a private network, a token can be used to grant a right, to pay for a job or to transfer data, as an incentive, as a gateway to extra services or a better user experience ... In the words of Cristina Carrascosa, a lawyer specializing in blockchain, "a token can be used in whichever way the person or organization designing and developing it decides. Tokens admit several layers of value inside it, so it is the token’s designer who decides what a specific token has inside."

Carrascosa notes that tokenization is still at an early stage. And this is not exclusively due to the lack of international regulations.  Moreover, "converting rights into purely digital assets implies a higher level of complexity for non-technological users."  But these are downsides that can be overcome over time.  That is why, according to Carrascosa, "those service provisions based on intermediation will need to provide an added value to compete with this technology." If they fail to do so, they will be left behind in the digital economy.

An example of this potential ‘replacement effect' are the so-called ICOs, or Initial Coin Offerings. ICOs are a new business fund-raising alternative: Instead of a traditional fund-raising round, or even an IPO, companies offer tokens - not shares - to the market, and investors use digital currencies like bitcoin to pay for these tokens. Everything through blockchain. As a financing tool, ICOs are already accounting for some remarkable figures: Between March 2016 and March 2017 a number of startups raised over $300 million in combined funding through ICOs.

The risks of investing on these ICOs are obvious. In an article, William Mougayar insists on the lack of transparency: The ICOs that companies are currently pursuing (which are now are eagerly awaited by the market) are not being valued based on traditional financial metrics (PER, ebitda, net income. ..), but on a future promise: "Although all projects have visions of being the next Bitcoin or Ethereum (just as regular startups dream of being the next Google or Facebook), we are seeing many ICOs looking just like applications, marketplace products, or technology solutions. Eventually, they will need to show real revenues or viable business models in order to strengthen and support the public valuations they will be receiving," says Mougayar.

Tokens are a new blockchain-based investment tool, and are as risk-laden as they are alluring. It is the market that has to learn how to use it wisely.