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Metacoins, Tokens, and other Blockchain inhabitants (Part I)

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Metacoins, Tokens, and other Blockchain inhabitants

When we talk about 'Blockchain' we quickly think of Bitcoins, the Ethereum network, or the not always understood Smart Contracts. However, there is another concept related to blockchains, generally less known, which is the token.

In this series of articles we will take a tour of the upper layers of blockchain technology, during which we will see what they are, what they are for, how they are created and how they are used.

What are tokens?

To begin with, we could say that a token is nothing more than a representation of a digital or physical asset, which is transferable and normally fungible (once used it cannot be reused).

Examples of tokens in the real world are casino chips or those used in car washes, but how does this concept fit into the universe of Bitcoins and Ether?

To better understand this, I think it is worth spending a few moments to briefly recall how the Blockchain technology works and what some other terms like "protocol" and "currency" mean in that context.

The Blockchain technology

Following the scheme of layers from bottom to top, Blockchain is the technology that serves as a basis for cryptomonies, metacoins and tokens.

Without going into too much detail, a blockchain is a distributed database in a network of peer-to-peer nodes, where each node independently stores a copy of all registered data.

From a structural point of view, the data of a blockchain is stored in blocks that are linked sequentially forming a chain, hence the name and whose internal network of Merkle trees and cryptographic hashes [1] guarantees the integrity of each and every one of the transactions noted.

Protocols

The nodes that are part of a blockchain infrastructure must comply with a set of rules of behavior and message exchange, which constitute the protocol of that blockchain (Examples: Ethereum and Bitcoin).

Coins

A [crypto]currency is the native digital asset of a specific blockchain protocol. It is also sometimes referred to as a native token or intrinsic token.

Although a blockchain doesn't actually need to have a cryptomat, both the Bitcoin and Ethereum block chains have their own (BTC and ETH respectively), and in fact, use them as "fuel" to be able to function: Bitcoins are used (indeed, generated) as a reward for the effort made by "miners" to validate transaction blocks, and the Ether is used, in addition to rewarding block generation, to pay for the processing power required to execute Smart Contracts.

Tokens

Finally, a token is, as we have already mentioned, a representation of a physical or digital asset built on the native currency of a blockchain, or to put it more correctly, on the application layer of that blockchain (we will see more about this in the next installment of this series).

When we create a token, we assign it a series of properties:

  • A name and a symbol (such as "Basic Attention Token", whose symbol is "BAT")
  • The initial number of "coined" units
  • Maximum number of units: can be open (the initial creator can create more units) or closed (there is a maximum number that cannot be extended)
  • Divisibility: a token can be divisible into smaller units ("have decimals") or be indivisible (whole number of units)

And obviously, we must link it to an underlying value or asset, either physical or virtual, or give it "power" to perform some action.

These characteristics will determine what we can do with the token, and even its behavior in economic parameters: a token that gives us the right to download a song will not have the same value as one that identifies us as the owners of a company's stock.

Similarly, a token that is scarce and of which it is not possible to create more units will tend to be more valuable than one of which there are millions of units, or that its creator can coin more when he deems it necessary.

What are tokens for?

An "object" with a value, special permissions or any other associated privilege, and whose balance in the various accounts in the system is securely recorded, can be used in a multitude of scenarios involving exchanges, payments or accreditation of permissions or privileges, such as the following:

  • Digital Rights Management
  • Loyalty programs (points, miles, etc.)
  • Collecting (stickers, art, among others)
  • Gaming: Unlocking features, levels, objects
  • Digital identity, access control
  • Property titles

The possibilities are enormous, and to get an idea of the number of token projects that are already in operation or those that are preparing their release to the market financed by Initial Coin Offers (ICOs), we can turn to pages like Token Data [2] or State of DApps [3].

Let's look at some examples that, either because of their interest, their potential, or their bizarreness have caught my attention in recent months:

  • The Basic Attention Token, or BAT, is a token created to serve as a bargaining chip between publishers, advertisers and users in the digital advertising environment, as an alternative to the "traditional" model based on cookies and fingerprints. It is part of the same project as Brave, the browser designed by Brendan Eich, the inventor of Javascript [4].
  • FoldingCoin is a token created to reward participants in the Folding@home project at Stanford University. FAH takes advantage of the processing power of the users' computers, when they do not need it, to perform protein folding simulations [5].
  • FoldingCoin is a token created to reward participants in the Folding@home project at Stanford University. FAH takes advantage of the processing power of the users' computers, when they do not need it, to perform protein folding simulations [5].

We have reached the end of the stage. In the next article in the series we'll see in more detail what the blockchain application layer is and how Ethereum and Bitcoin implement it.

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