All About Cryptocurrency Tokens

Yesterday was a good day for India’s crypto enthusiasts and businesses, in particular for WazirX, the country’s largest cryptocurrency exchange.

The Reserve Bank of India (RBI), which had been hemming and hawing on its crypto stance for long, finally cleared some air and discredited the contentious 2018 circular (already outlawed by the Supreme Court) that was being used by banks and other agencies to discourage crypto payments and usage on their platforms.

This is an important milestone in India’s crypto regulation story that several market participants had long feared would end with crypto’s defeat and a likely ban. WazirX reaped the direct benefits of this milestone. WRX, WazirX’s native token, jumped as high as ₹167.32 (from ₹100) during intraday trading.

The company also announced the launch of India’s first Non-Fungible Token (NFT) marketplace, where exclusive artwork will be showcased for purchase through the WRX token, at least partly fuelling the spike .

Say, what are these tokens? Are they similar to Bitcoin? Ethereum? Or do they represent some new and improved widget in the cryptosphere that has somehow passed us by?

Let’s take a closer look.

That’s What I’m Token About

First thing’s first. A token is not a digital coin or currency. It is, in a way, a derivative of them.

Let’s put it this way. Bitcoin is a coin or a currency which is built out of its own blockchain and is used as exchangeable money like fiat currencies — Dollar, Rupee etc. Tokens are built on top of those blockchains. They are essentially tradable assets which can be used for a number of economic purposes.

For instance, they can be used to raise money. When a company launches an Initial Coin Offering (ICO), it seeks investment from the public. But unlike an IPO, where investors get stocks in exchange for their investments, in an ICO they receive tokens.

The tokens issued in ICOs are called security tokens because they are intended for the same purposes as securities (or shares) are in a company — holders of the token gain ownership in the company.

Utility tokens, however, represent another category of crypto tokens. They are not bought with the intention of getting a return on investment. But they have great value and functionality (read: utility). Think of them as digital coupons which can be redeemed in the future for some fees or for special access to a product or service.

Picture this. A company launches a new project, like, say an online app. It can raise investment through the utility tokens to fund this project. And after the app has been developed, the investors (and now app users) can use the tokens for in-app purchases. The developers get capital and the app users get access to in-app tokens for future use. Great symbiosis.

(FYI: This is how Filecoin’s launchers raised $257m in exchange for granting access to token holders into Filecoin blockchain’s cloud storage platform).

WRX is one such utility token which is built on the Binance blockchain. There is also a cap on the number of WRX tokens ever created — 1 billion. Recently, Bitex, a UAE-based crypto exchange, issued its own utility token which is based on the Ethereum chain.

On April 5th, WazirX Founder Nischal Shetty said that the WRX token had crossed $1bn in market cap. To be fair, in the seven-day period leading up to this statement, WRX’s value had soared by 930%, showing the kind of volatility one notices in the crypto market. Few hours later, the WazirX site crashed.

Token Points of Utility

It would help to think of these tokens as loyalty reward points that are given on credit cards. You could redeem them as and when you want.

Similarly, there are tokens which give the holders special privileges, like, say, 20 hours of streaming content on a video-sharing blockchain. Some tokens also help procure other coins. Like one token equalling to, say, 15 Bitcoins on a particular blockchain.

Token holders can thus trade and transfer these tokens among other participants in the same blockchain. There are a wide range of use cases for utility tokens which makes them more versatile than cryptocurrencies like Bitcoin.

Sometimes, utility token holders also get voting rights (which is weird because even security tokens don’t offer voting rights like regular shares do). Holders can lock their tokens in the blockchain network to vote on things concerning the well-being of the network. For instance, vote to decide on who will participate in the “proof-of-stake”, or crypto mining activity.

Token Representations

The next question to ask is how the tokens are created. As stated before, tokens are built on blockchains. So it is up to exchanges and companies like WazirX to decide which blockchain platform to launch their tokens on.

More than 80% of the tokens available today are built from the Ethereum platform, or more precisely, the ERC-20 token standard. Why: accessibility, popularity and ease of coding. ERC stands for “Ethereum Request for Comment”.

But there are many other platforms that have developed over the years which serve as the underlying infrastructure framework to issue tokens. Binance (WazirX’s parent) was initially in the ERC-20 token family but it later launched its own BEP-2 token standard. This means that Binance is now running on both the ERC-20 and the BEP-2 platforms. WRX is based on the BEP-2 blockchain standard which means that it is a part of the Binance chain.

But what decides the valuation of the token? For security tokens, value correlates directly to the valuation of the company that issues the token (much like equity). For utility tokens, since their availability is limited, their value increases with rise in market demand.

Uptown Fungibility ft. NFTs.

Let’s get one thing straight. ALL cryptocurrency tokens are used for accessing decentralised blockchain-based applications. But the ones we have discussed above have set values and are tradable and interchangeable with other assets of the same value, meaning that they are fungible.

But there are other kinds of crypto tokens which hold data instead of value and are hence unique and non-fungible. Enter NFTs.

NFTs can’t be modified. The record of their ownership cannot be edited. Because each NFT represents a unique data value, no two NFTs are equal. And unlike security and utility tokens which are built on the ERC-20 standard, NFTs usually follow the ERC-721 standard.

The NFT marketplace that is being launched by WazirX essentially aims to capitalise on the growing trend of crypto tokenisation of assets. This marketplace will be conducted on a fixed price format for now (as opposed to auction). Assets will be tokenised (as NFTs), uploaded into the marketplace and sold in WRX (as utility tokens). This bundling of fungible and non-fungible tokens into a common operation is the defining point of this marketplace.

Tokenisation provides access to a growing market of crypto users and creates new revenue streams. In terms of regulation, security tokens rank higher than utility tokens and NFTs, as they are more integrated with market indicators. Utility tokens enjoy less than little consensus on regulation as of now but with growing numbers of crypto coins and derivative entities making their way into financial markets, it won’t be long before the scripted use and regulation of these tokens begin.

(Originally published June 2nd 2021 in transfin.in)