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Tokenomics Part 1

By Jaya Bijoor

What are tokens? How are they different from cryptocurrencies? What are tokens used for?


First things first, cryptocurrency and tokens are sometimes used interchangeably, but usually, they mean slightly different things. When we talk about cryptocurrencies, we’re talking about tokens native to a specific blockchain. The token serves as a payment method on that blockchain and is also used to pay transaction fees and rewards to miners.

In Ethereum, ETH is considered a cryptocurrency and a native network token.

Tokens encompass all tokens built on top of the blockchain. For instance, on top of the Ethereum blockchain, other tokens have been built aside from ETH, but these tokens are unnecessary for Ethereum to exist. Since Ethereum is a permissionless, public blockchain, anyone can create an Ethereum-based token. The only condition is that Ethereum token standards are used.


What is the purpose of tokens?


On a technical level, we have fungible and non fungible tokens. Fungible tokens act like regular fiat currency, whereas non fungible tokens are one of a kind, collectible items. We can differentiate between utility and security tokens. Utility tokens serve a function within the network or DAOs and projects. Security tokens are traditional securities and can be traded like other financial instruments.


Who decides if tokens are securities?


It’s a hard question, and SEC Chair Gary Gensler is still trying to figure this out.


And when it comes to utility, what exactly do tokens accomplish?


Here’s a list of what tokens can do: Currency: Native tokens can be used as a payment method, acting as a traditional currency.


Incentives: Many DAOs use tokens to pay contributors to the DAO. Similarly, blockchains use their native tokens to pay miners and incentivize holders to stake or hold their tokens.


Ownership: NFTs prove ownership of digital or physical assets.


Social Tokens: Tokens that give membership or access to social groups.


Governance: DAOs use tokens to determine the voting power of holders and enact governance systems.


Network Utility: Native tokens are used to pay for gas or as a stake in securing the network.


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