Introduction to Token Models and Evaluation Criteria
ERC-20 is the most widely used token standard for creating fungible tokens on the Ethereum blockchain. Fungible tokens are digital assets where each token holds equal value to another, like currencies.
Understanding tokenomics and its significance
source: Coinbase
Tokenomics is a critical aspect of creating valuable crypto assets. It serves as the recipe that defines the monetary policies, issuance, and removal of tokens in a crypto asset ecosystem. Think of tokenomics as the right mix of ingredients, just like adding the right pinch of salt to a burger to make it taste good. Tokenomics helps us understand the various aspects of a crypto asset, enabling us to make sound investment decisions. At its core, tokenomics uses game theory to design incentives that reward good actors and punish bad ones. It defines the role of tokens within an ecosystem and how they accrue value. Tokenomics is necessary for public blockchains, which are open to everyone, including bad actors. By aligning the behavior of each participant, tokenomics strengthens the protocol and creates trust.
The concept of tokenomics was first proposed by Harvard psychologist B.F. Skinner in 1972. He believed that a token economic model could be beneficial for aligning behaviors. In a well-designed tokenomics system, all costs and benefits are internalized, making it difficult for bad actors to exploit the ecosystem. Four different actors typically participate in blockchain projects: founders and developers who build the project; miners or validators who run the blockchain and provide security; investors who provide the capital needed to develop the project; and consumers who ultimately use the platform. Tokenomics creates a set of rules that align the interests of all these actors, reinforcing the ecosystem.
Types of tokens: Utility, Security, and Governance
Understanding the different types of tokens is essential for evaluating token models. Broadly, tokens can be classified into three main categories: utility tokens, security tokens, and governance tokens.
Utility tokens:
Utility tokens are digital assets that do not account for any real-world assets. Instead, they are used to access goods or services through a specific platform. For example, Ether, the most popular utility token, is used to pay for gas on the Ethereum network. Some platforms may also offer tokens as rewards for performing tasks or giving feedback. The value of utility tokens depends primarily on the demand for goods or services transacted on the platform and the quantity of tokens in circulation. The operation of miniature economies supported by utility tokens is consistent with the central tenets of the Quantity Theory of Money (QTM), which enables the assessment of a token price based on the token economy’s fiat currency-denominated GDP.
Security tokens:
Security tokens are digital assets that represent real-world assets, such as a company’s equity, a debt instrument, or a commodity. They are regulated by governments and must adhere to various laws, including Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Security tokens are backed by real-world assets and can be traded like securities on traditional exchanges.
From a valuation perspective, security tokens can be viewed as akin to ordinary equity securities. Token holders have the right to receive distributions of profit from the activities carried out by the issuing organization. The valuation of security tokens can be conducted using traditional methods under the market approach or the income approach.
Read more: https://www.gate.io/learn/articles/utility-tokens-vs/125
Governance tokens:
Governance tokens are cryptocurrencies that allow holders to participate in on-chain governance for a crypto project. They grant holders voting rights on proposals related to the project’s development, upgrades, and management. Most decentralized exchanges (DEXs) and crypto lending sites use governance tokens to give community members a say in the platform’s direction. Holders can use governance tokens to accept or reject changes to a decentralized application (dApp) or blockchain during scheduled voting periods. Many dApps also allow people to use their governance tokens to create initiatives and put them up for a vote.
Read more: https://www.gate.io/learn/articles/governance-token-and-its-value/272
Similarities between Tokens:
All three types of tokens are based on the same underlying technology and are traded 24/7 on the blockchain. Transactions for utility, security, and governance tokens are settled instantly, reducing costs for market participants.
Differences between Tokens:
Regulation Status: Utility and governance tokens are generally not regulated. While some tokens, like Bitcoin, are not considered securities, many unregulated utility tokens and cryptocurrencies are unregistered securities. Security tokens, on the other hand, are classified as securities and are usually registered with regulators like the SEC. Security token holders have the same rights, obligations, and protection as owners of traditional securities.
Trading Venue: Cryptocurrency trading, including utility and governance tokens, occurs on various exchanges, each with its own set of rules. In contrast, security tokens are traded on licensed Alternative Trading Systems (ATS) like INX, as they are considered securities and subject to regulation.
Dividends and Voting Rights: Crypto tokens, including utility tokens, are unregulated and cannot legally offer dividend payments, or they risk being classified as unregistered securities. Security tokens can represent an investment contract promising potential income, which may come in various forms, such as revenue sharing among token holders. Governance tokens, on the other hand, grant holders voting rights on proposals related to the project’s development, upgrades, and management.
Whitelisting: While utility and governance tokens can be sent and received by anyone, security tokens can only reside in whitelisted wallets. A “whitelisted” wallet has been approved by a KYC process to participate in a registered security transaction.
Token standards: ERC-20, ERC-721, and ERC-1155
ERC-20
ERC-20 is the most widely used token standard for creating fungible tokens on the Ethereum blockchain. Fungible tokens are digital assets where each token holds equal value to another, like currencies. Examples of ERC-20-compliant tokens include stablecoins such as USDT, USDC, and BUSD; governance tokens like MKR and UNI; and utility tokens such as BAT.
The ERC-20 standard, from a technical side, consists of six mandatory functions that every ERC-20 token must implement:
- TotalSupply(): The total supply of ERC-20 tokens
- BalanceOf(): The balance or the total number of tokens in a wallet
- Transfer(): Enables the transference of tokens from the caller’s account to another account.
- TransferFrom(): Similar to transfer(), but allows smart contracts to transfer tokens on the owner’s behalf.
- Approve(): Sets a limit on the number of tokens a user is allowed to spend.
- Allowance(): The total number of tokens a user is allowed to spend on the owner’s behalf.
Read More: https://www.gate.io/learn/articles/an-introduction-to-erc-20-tokens/77
ERC-721 Token Standard
ERC-721 is the token standard used to create non-fungible tokens (NFTs) on the Ethereum blockchain. NFTs are unique cryptographic tokens that don’t share value with any other token similar to them, like unique artwork or collectibles.
Examples of NFTs built using the ERC-721 standard include CryptoKitties and the $69.3 million-worth NFT by Beeple. The basic ERC-721 functions are:
- BalanceOf(): The balance or the total number of tokens in a wallet
- OwnerOf(): Owners TokenID
- SafeTransferFrom(): Transfer tokens from the owner’s wallet to the receiver’s account.
- TransferFrom(): Similar to transfer() but usually not recommended
- Approve(): Triggers approval events
- SetApprovalForAll(): Enables the operator to call SafeTransferFrom
- GetApproved(): Gets the approval for the specific tokenID.
- IsApprovedForAll(): Verifies if the operator has the authority to manage the assets of the owner.
ERC-1155 Token (Multi-Token) Standard
ERC-1155 is the multi-token standard that combines the functionalities of both the ERC-20 and ERC-721 token standards. It addresses two pain points that persist in the previous iterations of token standards:
- Support batch transfers of multiple assets in one smart contract.
- perform functions of both ERC-20 and ERC-721 token standards
ERC-1155 allows for the creation of semi-fungible tokens, which can be used as fungible tokens during trading and become NFTs if redeemed. Many blockchain games and NFT projects, like Adidas Originals, utilize the ERC-1155 standard.
The basic ERC-1155 functions and features are as follows:
- BalanceOfBatch(): Returns the balance amount in a batch with IDs
- SetApprovalForAll(): Allows operators to transfer caller tokens
- IsApprovedForAll(): Verifies if the operator can transfer caller tokens.
- SafeTransferFrom(): Transfers tokens from the caller’s address to the receiver’s address
- SafeBatchTransferFrom(): Functions the same as SafeTransferFrom() but in batches
Lección 1:Introduction to Token Models and Evaluation Criteria
Lección 2:Assessing the Token's Value Proposition and Utility
Lección 3:Evaluating Token Distribution, Supply Mechanisms, and Incentives
Lección 4:Investigating the Project's Team, Roadmap, and Potential Risks
Introduction to Token Models and Evaluation Criteria
ERC-20 is the most widely used token standard for creating fungible tokens on the Ethereum blockchain. Fungible tokens are digital assets where each token holds equal value to another, like currencies.
Understanding tokenomics and its significance
source: Coinbase
Tokenomics is a critical aspect of creating valuable crypto assets. It serves as the recipe that defines the monetary policies, issuance, and removal of tokens in a crypto asset ecosystem. Think of tokenomics as the right mix of ingredients, just like adding the right pinch of salt to a burger to make it taste good. Tokenomics helps us understand the various aspects of a crypto asset, enabling us to make sound investment decisions. At its core, tokenomics uses game theory to design incentives that reward good actors and punish bad ones. It defines the role of tokens within an ecosystem and how they accrue value. Tokenomics is necessary for public blockchains, which are open to everyone, including bad actors. By aligning the behavior of each participant, tokenomics strengthens the protocol and creates trust.
The concept of tokenomics was first proposed by Harvard psychologist B.F. Skinner in 1972. He believed that a token economic model could be beneficial for aligning behaviors. In a well-designed tokenomics system, all costs and benefits are internalized, making it difficult for bad actors to exploit the ecosystem. Four different actors typically participate in blockchain projects: founders and developers who build the project; miners or validators who run the blockchain and provide security; investors who provide the capital needed to develop the project; and consumers who ultimately use the platform. Tokenomics creates a set of rules that align the interests of all these actors, reinforcing the ecosystem.
Types of tokens: Utility, Security, and Governance
Understanding the different types of tokens is essential for evaluating token models. Broadly, tokens can be classified into three main categories: utility tokens, security tokens, and governance tokens.
Utility tokens:
Utility tokens are digital assets that do not account for any real-world assets. Instead, they are used to access goods or services through a specific platform. For example, Ether, the most popular utility token, is used to pay for gas on the Ethereum network. Some platforms may also offer tokens as rewards for performing tasks or giving feedback. The value of utility tokens depends primarily on the demand for goods or services transacted on the platform and the quantity of tokens in circulation. The operation of miniature economies supported by utility tokens is consistent with the central tenets of the Quantity Theory of Money (QTM), which enables the assessment of a token price based on the token economy’s fiat currency-denominated GDP.
Security tokens:
Security tokens are digital assets that represent real-world assets, such as a company’s equity, a debt instrument, or a commodity. They are regulated by governments and must adhere to various laws, including Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Security tokens are backed by real-world assets and can be traded like securities on traditional exchanges.
From a valuation perspective, security tokens can be viewed as akin to ordinary equity securities. Token holders have the right to receive distributions of profit from the activities carried out by the issuing organization. The valuation of security tokens can be conducted using traditional methods under the market approach or the income approach.
Read more: https://www.gate.io/learn/articles/utility-tokens-vs/125
Governance tokens:
Governance tokens are cryptocurrencies that allow holders to participate in on-chain governance for a crypto project. They grant holders voting rights on proposals related to the project’s development, upgrades, and management. Most decentralized exchanges (DEXs) and crypto lending sites use governance tokens to give community members a say in the platform’s direction. Holders can use governance tokens to accept or reject changes to a decentralized application (dApp) or blockchain during scheduled voting periods. Many dApps also allow people to use their governance tokens to create initiatives and put them up for a vote.
Read more: https://www.gate.io/learn/articles/governance-token-and-its-value/272
Similarities between Tokens:
All three types of tokens are based on the same underlying technology and are traded 24/7 on the blockchain. Transactions for utility, security, and governance tokens are settled instantly, reducing costs for market participants.
Differences between Tokens:
Regulation Status: Utility and governance tokens are generally not regulated. While some tokens, like Bitcoin, are not considered securities, many unregulated utility tokens and cryptocurrencies are unregistered securities. Security tokens, on the other hand, are classified as securities and are usually registered with regulators like the SEC. Security token holders have the same rights, obligations, and protection as owners of traditional securities.
Trading Venue: Cryptocurrency trading, including utility and governance tokens, occurs on various exchanges, each with its own set of rules. In contrast, security tokens are traded on licensed Alternative Trading Systems (ATS) like INX, as they are considered securities and subject to regulation.
Dividends and Voting Rights: Crypto tokens, including utility tokens, are unregulated and cannot legally offer dividend payments, or they risk being classified as unregistered securities. Security tokens can represent an investment contract promising potential income, which may come in various forms, such as revenue sharing among token holders. Governance tokens, on the other hand, grant holders voting rights on proposals related to the project’s development, upgrades, and management.
Whitelisting: While utility and governance tokens can be sent and received by anyone, security tokens can only reside in whitelisted wallets. A “whitelisted” wallet has been approved by a KYC process to participate in a registered security transaction.
Token standards: ERC-20, ERC-721, and ERC-1155
ERC-20
ERC-20 is the most widely used token standard for creating fungible tokens on the Ethereum blockchain. Fungible tokens are digital assets where each token holds equal value to another, like currencies. Examples of ERC-20-compliant tokens include stablecoins such as USDT, USDC, and BUSD; governance tokens like MKR and UNI; and utility tokens such as BAT.
The ERC-20 standard, from a technical side, consists of six mandatory functions that every ERC-20 token must implement:
- TotalSupply(): The total supply of ERC-20 tokens
- BalanceOf(): The balance or the total number of tokens in a wallet
- Transfer(): Enables the transference of tokens from the caller’s account to another account.
- TransferFrom(): Similar to transfer(), but allows smart contracts to transfer tokens on the owner’s behalf.
- Approve(): Sets a limit on the number of tokens a user is allowed to spend.
- Allowance(): The total number of tokens a user is allowed to spend on the owner’s behalf.
Read More: https://www.gate.io/learn/articles/an-introduction-to-erc-20-tokens/77
ERC-721 Token Standard
ERC-721 is the token standard used to create non-fungible tokens (NFTs) on the Ethereum blockchain. NFTs are unique cryptographic tokens that don’t share value with any other token similar to them, like unique artwork or collectibles.
Examples of NFTs built using the ERC-721 standard include CryptoKitties and the $69.3 million-worth NFT by Beeple. The basic ERC-721 functions are:
- BalanceOf(): The balance or the total number of tokens in a wallet
- OwnerOf(): Owners TokenID
- SafeTransferFrom(): Transfer tokens from the owner’s wallet to the receiver’s account.
- TransferFrom(): Similar to transfer() but usually not recommended
- Approve(): Triggers approval events
- SetApprovalForAll(): Enables the operator to call SafeTransferFrom
- GetApproved(): Gets the approval for the specific tokenID.
- IsApprovedForAll(): Verifies if the operator has the authority to manage the assets of the owner.
ERC-1155 Token (Multi-Token) Standard
ERC-1155 is the multi-token standard that combines the functionalities of both the ERC-20 and ERC-721 token standards. It addresses two pain points that persist in the previous iterations of token standards:
- Support batch transfers of multiple assets in one smart contract.
- perform functions of both ERC-20 and ERC-721 token standards
ERC-1155 allows for the creation of semi-fungible tokens, which can be used as fungible tokens during trading and become NFTs if redeemed. Many blockchain games and NFT projects, like Adidas Originals, utilize the ERC-1155 standard.
The basic ERC-1155 functions and features are as follows:
- BalanceOfBatch(): Returns the balance amount in a batch with IDs
- SetApprovalForAll(): Allows operators to transfer caller tokens
- IsApprovedForAll(): Verifies if the operator can transfer caller tokens.
- SafeTransferFrom(): Transfers tokens from the caller’s address to the receiver’s address
- SafeBatchTransferFrom(): Functions the same as SafeTransferFrom() but in batches