People are only becoming familiar with the idea of digital money in the form of cryptocurrencies like bitcoin, where transactions are recorded on a secure distributed database called blockchain. And now comes a new concept: the token blockchain, which I followed as a blockchain researcher and teacher of courses on cryptocurrency and token blockchain.
In the last 18 months, digital developers have raised more than US $ 20 billion through a funding process called "initial coin supply" – many of which use tokens. There are two common categories: "utility" token and "security" token
Utility tokens are essentially cryptocurrencies that are used for a specific purpose, such as purchase of a particular good or service. For example, if you want to store information online, the most common way today is to become a customer of a hosting service like Google Drive, Dropbox or Amazon Web Services. It reserves a certain amount of storage space on those companies' servers and you pay with dollars, euros, yen or other national currencies.
But there is another way. The Filecoin network, for example, expects to provide similar cloud storage services without using buildings full of huge servers. Instead, its users will store their data, in an encrypted form, on the free hard disk space of other normal people. This requires a different form of tracking how much space a person uses and a new way of paying for all people whose hard drives are hosting data. Enter the utility token, in this case named Filecoin.
Because a customer stores more data, the network will deduct from its Filecoin token balance and send those tokens to each storage provider based on the amount of data they host. Customers can buy multiple tokens with any currency they want and hosts can exchange them with any currency they choose or keep them in storage for their data.
In addition to automating the use and payment of data, Filecoin tokens offer another advantage over regular currencies: they can be used in increments much smaller than cents, so prices can be very accurate.
The goal of Filecoin is a reliable and secure cloud storage system like commercial operations, but decentralized. The utility token is simply a tool that makes this approach possible.
NEXT READY: In the Panama Papers era, is Bitcoin technology the future?
A security token, sometimes called "token security" or "secure encryption", is more than one currency: it often represents the property of an underlying asset real. Like traditional stocks or bonds, they are regulated by the Securities and Exchange Commission in the United States. Regular titles are tracked on paper or, more likely these days, in a centralized database. Security tokens use a blockchain system – a decentralized database – to track who owns which assets.
The use of blockchain-based security tokens expands trading beyond normal banker and stock exchange hours and can allow faster transactionalization. In addition, a software-based marketplace that enables intelligent contracts can automate various aspects of regulations and relationships.
Security tokens facilitate access to more investments by customers: just as a single E-Trade investment account can keep records for a variety of different bonds and bonds, a digital portfolio based on blockchain it can do the same for a number of different security tokens, which represent equity, debt and even real estate.
Connection to cryptocurrencies
Nor does a kind of token require its blockchain, as do the bitocrines and cryptocurrencies of Ethereum. Instead, tokens can outsource their property accounting systems, linking them to pre-existing blockchain registries. This in effect creates a new sublingger, such as the ledger of the Ethereum network, only for that particular token. All users who send a tracked token to Ethereum pay a small transaction fee to the Ethereum network to validate the transaction.
Tokens are still at an early stage of development. I expect to see many innovations about how to use them for years to come.
Stephen McKeon is an Assistant Professor of Finance at the University of Oregon. This article was originally published on The Conversation. Read the original article.