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Design Considerations for your Digital Asset

This guide will walk you through the different types of tokens and when you should use them.

Changing Landscape

The digital asset and token landscape is evolving! If you think this article deserves updating or needs a refresh, help us by suggesting edits 👆. Much of this articles content was pioneered by Sermin Voshmgir at Crytoeconomics Research Lab. 👋

In blockchain, tokens are a combination of value representation and/or access to rights. This broad scope makes it non-trivial for determining how you should design your token, however, we're here to help. In order to identify the desired characteristics of your token, we will walk through four considerations.

1. Technical Considerations

How are your tokens technically derived? We've seen two types of tokens from a technical perspective Protocol Tokens and App tokens.

Protocol Tokens

These are part of the incentive mechanism that allow a decentralized protocol like Aion - Aion - A multi-tier blockchain network designed to support a future where many blockchains exist to solve unique industry problems and to power the services of the modern world. function. They act as a block validator incentive (miner rewards) and in transaction spam prevention.

App Tokens

These are tokens that are issued on the application layer with a few lines of code through a smart contract. Many are based on pre-defined token standards like Ethereum's ERC-20 or Aion's ATS. They can represent:

  • physical goods
  • digital goods
  • right to perform an action in a network
  • right to perform an action in the real world

2. Rights Considerations

What type of rights are attached to your token? Your token may have a hybrid of these classifications but there are some clear conceptual buckets.

Store of Value (Passive Token)

Right to an underlying economic value.

  • Security Tokens: representing shares of a business
  • Asset-backed Tokens: real-world assets represented as tokens to be transferred and traded in a trustless environment.
  • Currency Tokens: representative of an amount of a currency. As an example, a Bitcoin represents 1BTC worth of value.

Access or Activity Rights (Active Token)

The token is required to participate in a network that no centralized party controls. In this classification we have

  • Usage Tokens: right to use network services.
  • Work Tokens: right to produce value within a network.
  • Reputation/Reward Tokens: Privileged right to do something within a network.

3. Fungibility Considerations

What type of properties does your token hold?

Fungible Tokens

  • Only quantity matters, units of fungible assets of the same kind are indistinguishable.
  • Any amount can be merged or divided into a larger or smaller amount of it making it indistinguishable from the rest.

Non-Fungible Tokens

  • Unique and can be distinguished from each other
  • Have varying properties
  • Everyone knows how many there are

4. Legal Considerations

Disclaimer: We are not advising on legal matters when it comes to tokens. Please hire professional lawyers when it comes to legal opinion.
How will the token be regulated? International regulators are still trying to understand and classify different token types. Here is the current state of affairs:

Currencies: Regulated by financial market authorities.
Securities: no physical asset, just contracts, fall under securities law:

  • equity tokens
  • convertible bonds
  • debenture tokens
  • option tokens
  • smart contract features
  • bond token
  • smart swap contracts

Utility Tokens: Still unknown.

Having trouble reasoning about the legal properties of your token?

Coinbase built a nifty tool for determining if your token is a utility or security.

Design Considerations for your Digital Asset

This guide will walk you through the different types of tokens and when you should use them.

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