Why do blockchain networks need crypto tokens? Ideally, for any transactional blockchain network to function properly such as Bitcoin it makes a lot of sense to have coins or tokens.
It helps to make faster transactions at a cheaper rate and also with the use of less energy.
Now you may ask what about those particular blockchain networks that are not necessarily transactional or financial in nature.
Why do these frameworks also have tokens that they can buy or sell?
Well, the need for tokens is from a utility and security point of view.
However, people are quite worried about tokens and some of them think that they create a lot of fuss rather than help them in any way.
And, as for the investors, they are quite wary about it when it comes to investing in a new crypto token.
The main reason behind it is that the crypto tokens do not have a unique blockchain network of their own as the crypto coins but still can do an ICO or Initial Coin Offering.
They doubt that these are scams and fraudulent and are designed to raise capital for the creators without really investing in the tech behind the blockchain.
Well, this shows their lack of understanding mostly of the blockchain network and its capabilities though their concerns are not totally irrelevant.
However, when they know the real reasons behind the need of these tokens by the non-security, non-financial, and non-token reliant blockchain networks all doubts will be cleared.
In this article you will find some of the preliminary reasons why a blockchain network needs tokens to function.
Why Do Crypto Blockchain Networks Need Crypto Tokens?
There are several different schemes out there that have a valid reason to issue such tokens such as the famous Bitconnect.
When looked at all these reasons together, many of them may seem similar to each other and also dependent on one another.
However, it is important to know them all in order to have a much clearer and a complete picture.
Tokens, as such, are very much in their nascent stages of development but these have already shown that they have huge potential and their significance and use today are almost undeniable.
Want to know whether the Rolex or the Coach purse you bought is a knock-off or not?
Or, do you want to track back the source of the outbreak of a food-borne disease in minutes?
Well, all these can be possible with the use of tokens and blockchain.
But, as it is said, ‘there is no blockchain without cryptocurrency,’ it needs tokens for support and to execute.
For Powering up Blockchain:
The tokens power up the blockchain network during the verification process called mining.
This process involves miners that compete with each other to solve a complicated mathematical problem and be the first one to do so and win the reward for the effort.
However, this reward is only given when the solution is announced to the other miners who need to confirm that the result is correct.
If most of them do then this new block is added to the chain and the miner is rewarded in the same coin.
In this case, the reward to the miner is given in crypto tokens and not in cash.
In addition to this, there are also several other ways in which the tokens power up the blockchain to function.
For example, the Ethereum blockchain network allows others to create tokens, called ERC 20 tokens, on this blockchain that performs as an escrow between the parties involved.
In such situations, it is the Ethereum blockchain network that administers the implementation of smart contracts and the token, on the other hand, completes the transaction.
For Acting as a Currency:
Though this reason is quite obvious it is quite worthy to point out that the tokens act as a currency.
These currency tokens facilitate making payments between two parties when you buy any product such as clothes, car, or even groceries.
All these are done via the blockchain network.
As of now, the most widely used coin for this purpose is Bitcoin because it is more reliable and a staple crypto coin in the industry but others like XRP, Litecoin, and NEM are also proving to be good transactional currency examples.
However and sadly, as for the tokens, these are still extremely volatile and therefore their use has not become mainstream.
It seems that the markets, businesses and industries are still apprehensive about its wide adoption simply due to its volatile nature.
Imagine buying a piece of bread and paying in Bitcoin only to find that the value of Bitcoin increased so much the next day that you could have paid for your whole dinner with the same number of coins.
Or, imagine selling and receiving a certain number of Bitcoins only to find that the value of those coins have fallen significantly in the following week thereby causing loss in your property value eventually.
Still, there are several companies, big and small, and even realtors who are accepting payments in Bitcoin and its token BTCT as currency.
As for the other tokens there is a long way for them to go to reach a high market cap, establish dominance and show price stability.
It is only then these tokens will be considered as currencies.
Till then such transactions will continue to end up with their conversion to traditional fiat currency.
For Smart Contract Reliability:
From the perspective of smart contracts, the crypto tokens seem to offer a lot of advantages as of now especially when it comes to making cross border payments and international transactions.
Currently, if you are a US citizen and want to buy a product from Russia or India, there will be a lot of parties involved in the transaction to facilitate it.
In lieu of their service offered, they will charge a small fee.
Moreover, the transaction will involve multiple steps to complete as well.
These numerous steps typically eliminate the chances of any fraud or the deal being reversed by the seller after receiving the payment.
In such cases the buyer is left with no recourse. Even then, this procedure does not seem to be that effective.
However, when a smart contract escrow payment system is used, the money will be held in that account safely until the buyer receives the product.
The buyer can inspect it and, if satisfied, enter a unique code that will indicate that the payment may be made.
For all these, there is no need for a middle man between the buyer and the seller and there will not be any chargeback schemes by PayPal, for example, either.
It will not need any insurance from a credit card company. It all happens due to the Smart Contract reliability which is ensured by the tokens.
For Cross Border Payments:
The tokens have proved to have huge potential to transform making cross border payments.
Imagine a corporate customer holding a bank account in New York City wants to transfer a huge amount in US dollars to a company located in London who wants the money in British pounds sterling and not in USD in the bank.
As of now, this process is quite complicated and will need both the banks to have the same amount of money with them worth in USD and British pounds sterling as the case may be.
It is only then that the transaction will be initiated and completed after following other necessary procedures.
The entire process will take quite a few days to reach the bank in London and then be converted into the currency of the UK.
And, for that, both the banks will charge some fees calculated as a percentage of the total amount from the respective parties involved in the transaction.
These inconveniences in time and expenditure are eliminated by the open and fast blockchain network software but will need a token to perform.
The sender will need to buy these tokens equal to the worth of money to be sent and deposited in the bank in NY City.
These coins are then sent instantly to the bank in London where it is sold right away to convert into British pounds sterling.
The entire process takes just about 10 seconds. You read it right – 10 seconds.
And, the fees for making such a transaction will be as low as 10 to 20 dollars.
Remember, crypto and blockchain can work anywhere and everywhere because they are border or geographic agnostic, even if they are banned.
For Proving Ownership:
The tokens can also be used as a proof of asset ownership.
These assets can be anything tangible or physical such as cars, homes, boats and others.
When a transaction is recorded on a blockchain by using a token it will be easy for all to track the original owner of the particular asset along with all of the subsequent owners of it, if any, due to the blockchain technology.
This eliminates the hassles to prove such things as well as the need for huge paperwork.
This not only simplifies the process but also eliminates the chances of fraud and theft.
Tracking the ownership history of assets or inheritance of the same through tokens is most useful in those countries in particular where politics and systems to maintain such records are shady.
In fact, there are lots of blockchain networks that have placed land ownership as one of their services to prevent fraud as its primary benefit.
However, the secondary benefit of it is that it eliminates the need of all middle men and the need to pay them fees for their services.
There is no title insurance company, or bank, or even a lawyer needed for it.
The best part is that it will take just a couple of minutes to know everything about the previous owners of the asset instead of days that a traditional title ownership searching system typically would have taken.
A few specific tokens such as FCT will also enable you to store other types of records permanently in it as well.
For Proving Stake or Equity:
If you own any equity in a company or companies or stake crypto coins, you can easily prove your ownership with the use of tokens and blockchain as well.
Moreover, when you are granted tokens, as a crypto investor you can solidify your stake in the network.
This will allow you to dilute shares, break up tokens, and transfer them as well to other investors very easily on the blockchain network.
As said earlier, with the use of tokens companies can do ICOs instead of IPOs for several reasons apart from that the token ownership as of now is not tracked or regulated.
A few of these reasons are:
- Expediting the transfer times
- Storing more information and
- Reducing exchange fees.
This is facilitated by the decentralized nature of the tokens which incongruously goes against the philosophy of blockchain.
However, this proves the flexibility and potential of the tokens.
Though it has not been put into practice yet, it is just a matter of time that the companies will want to make the most out of the tokens and will soon go all out and do an ICO and avoid doing IPOs.
For Incentivizing:
The tokens can also act as an incentive. This point may seem to be the culmination of all of the reasons mentioned above but it is still worth mentioning in isolation.
Typically, any idea or a vision can be great and extremely inspiring but it is true only when there is a good logic behind it as well as something in it that will motivate others.
Imagining a world with no bureaucracy or fiat money may seem extremely foolish but if there is something that is substantial and logical behind it, it may prove to be quite an achievable idea.
This is what the tokens do for the crypto investors, traders, and especially the miners.
They are all incentivized well enough to participate in a particular blockchain network with tokens related to that particular blockchain.
More and more people take part in crypto trading which increases the trading volume as well as the potential of the coin which eventually helps in determining the price of it.
As Tracking Devices:
The tokens can be used as tracking devices on a blockchain network.
These tokens can be combined with different tracking technologies such as the RFID or Radio Frequency Identification that will help in tracking the shipping stages of products and handling of the same.
It can also help in verifying the legitimacy of a product along with its movement right from the factory shed of the manufacturer as the source to the user in the end.
It is believed by the crypto and market experts that anti-counterfeit and logistics blockchain networks will be the fastest growing blockchain networks in the next couple of years when the true potential of it will be realized by all supply chains.
However, it has already shown its potential with some majors implementing this technology in their operations.
These companies have been intelligent enough to realize the chances of fraud, hacks or even system failure and their effects when internal databases and ledgers are used.
They found that it can be safely, securely, efficiently and quickly done by the public decentralized ledgers since these are resistant to all such occurrences.
For Crowdfunding:
Tokens can also help in hosting crowdfunding.
Ideally, if you want to launch a startup you will need money and for that you will need investors.
This can be a rather demanding task traditionally.
However, you can easily go around the need for investors and get to the people straight away with the use of tokens.
When you launch your tokens people will buy them to pre order your product. The proceeds can be used as the capital for your company.
The token will ensure the people that they will receive the product when it is manufactured and released by you in the market.
On the other hand, as for you and your company, the token will allow you to see how many products are ordered and provide a lot more information.
It is basically crowdfunding by using blockchain technology, and the token facilitates it.
For the Future:
It is believed that tokenization is the need for the future and this is another most significant reason after powering the blockchain as to why networks need tokens.
This will virtually open an endless number of possibilities both theoretically and practically and all of it does not involve money.
By owning the tokens people can own parts of assets such as a non-physical asset or a digital artwork for example, and that is not all.
All certificates, documents, paperwork and data will be tokenized.
This will ensure that the users do not need to fill up a form or go through the same long and tedious paperwork.
For example, when you need to see a doctor, you and the doctor will have easy access to your medical records and your identity will also be verified easily and quickly.
This is a significant help in the case of getting health insurance as well.
On the other hand, imagine that you want to buy a car.
With the use of the seller’s token and blockchain you can check the age of the car, the previous owners of it, and even if the car has met with an accident before.
As for the collectible assets, these can be verified for its authenticity via the RFID tags embedded and the serial number of it by using a token on a blockchain.
Some Other Reasons:
When tokens are used on a blockchain along with the traditional consensus algorithm that you are already aware of, it will allow building a system that is free from attacks.
This is in addition to the fact that it will offer economic as well as game-theoretic inducements to the participants who support the ecosystem instead of attacking or misusing it.
When the developers hold their tokens of a specific blockchain till the time it is widely accepted, it will give them an opportunity to make profits.
When it happens, the tokens will cost much more than what it was before and they can trade the tokens or sell them off for fiat money.
And, without using a token, a blockchain network will first have to prove its functionality and its ability to function as a distributed trustless system.
In addition to that, it will also need to prove that it can offer long-term profits.
All these are made easy when the blockchain network uses tokens.
Conclusion
A Bitcoin is certainly powered by a blockchain but then all blockchain networks do not use it.
In fact, there are several networks that do not use any cryptocurrency or token which may vary on the type of it. But most of them do and now you know why.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.
