Token-based Platforms
Ahoy! We are nearing the end of our Navigating Blockchain series – happy to have you on board! The previous section ventured into Initial Coin Offerings which is a method that companies, especially start-ups, use to raise funds to develop their technology, products and services. ICOs are the cryptocurrency industry’s equivalent to an initial public offering (IPO), and are primarily used by companies that work with blockchain technology.
ICOs are offered on Token-based platforms, and this is where the wind will take us next.
Our modern economy with its technological advances have made it possible for companies to facilitate transactions between buyers and sellers using blockchain technology. These platforms use tokens as their primary commodity.
Now, you may think that token-based platforms are other-worldly, or that they are all scams, or you may know that token-based platforms have been part of our lives for a long time. Let us look at the ‘Token-based’ component first.
Token-based systems
Have you ever visited a fair, carnival or expo where you had to buy a string of tickets that would be used to go on rides or buy food? These tickets were utility tokens which you bought with (fiat) money. The same is true for any games arena or casino where you buy ‘chips’ or tokens which represent a certain stake in the game. Some banks and grocery stores give members ‘benefit points’ with which they can get discount – these points are also token-based. So we could safely say that token-based systems are already part of our world.
What is new is that these systems now store their data on a blockchain, which opens up a host of new possible applications for token-based systems.
Blockchain
A blockchain-based approach to commerce is when a company develops a platform for buyers and sellers to interact, and store the transaction data on a blockchain (instead of on a traditional database). Many of these platforms make transactions simpler, safer and more convenient by using utility tokens as their means of exchange.
We know from our previous section that ICO’s are initiated by companies in the tech industry to raise the funds to develop their technology. Before a platform is accessible to users, the platform building entity issues tokens with the aid of smart contracts during an ICO. The ICO is used to finance further development of the platform. During the ICO, the company sells utility tokens which are bought by investors and gives them access to future products or services [1].
The issued token is the only means of payment on the platform, while the token is exchangeable for a fiat currency or cryptocurrency on a secondary market.
This means that your utility token can be used as a means of payment on the platform developed by the issuing company [1], but also only there. If you wanted to use the token value for something other than what the issuing company offers, you would exchange it against either fiat or crypto money on an exchange platform such as T-swaps.
Benefits of token-based platforms
Two of the key benefits of token-based platforms are low fees and high potential growth. Firstly, there are very low (or no) transaction costs on these platforms and they are not subject to interest rates. Secondly, if sufficient potential users have confidence in the platform and the token, they buy tokens to be part of the platform and expect a financial profit because the token value increases with the increasing number of platform participants.
Buying and exchanging tokens requires a digital wallet – this is what we will introduce in the next section. We at Yknot Blockchain Solutions think of tokens in terms of our stake in the treasure, and so you could say that your digital wallet is your treasure chest. Building on this metaphor, we could think of your participation in ICO’s are choosing which road to follow on your ‘treasure map’ in order to find the best gems.
References
[1] “Ethereum Whitepaper DAO,” ethereum.org. [Online]. Available: https://ethereum.org/en/whitepaper/#decentralized-autonomous-organizations. [Accessed: 06-Jul-2021].