Do Your Own Research: The Periodic Table of Tokens – Part 2

In the last article in the series, we highlighted the technology, token distribution and regulation. This time, the focus will be on token classification. Distributed Lab’s TokenD Token Classification Framework provides an approach to this and helps distinguish between different use cases.

The subdivision into cryptocurrencies, utility tokens, and security tokens is somewhat general, so different approaches have been taken to further subdivide them. Distributed Lab, for example, has developed TokenD, a framework for classifying tokens. This is somewhat more complex than the approaches discussed in the first part of this series.

(De)centrality as a benchmark for token valuation

To distinguish different digital assets, the team behind Distributed Lab assumes that a digital asset system can be managed from five aspects (governance, custody, issuance and distribution, transaction processing, and auditing). These five aspects are:

  • Governance includes five different sub-aspects, according to Distributed Lab. A possible KYC regulation as well as a possible contact with authorities belong here just as much as the user management or the setting of fees.
  • Custody describes how investors receive their investment. Tokens can be bought directly against fiat money or cryptocurrencies. However, one may also need to transfer money to the project behind the token or deposit crypto into an escrow account. Likewise, conversely, the withdrawal process counts as well.
  • Issuance includes the generation and distribution of the tokens. The issue, in the case of cryptocurrencies, can be the associated token.
  • Transaction processing includes details regarding peer-to-peer transactions, the purchase process from the user’s perspective, or the exchange of assets. Additionally, one can look at the extent to which the investor can make decisions: Does he invest in an index or does he make all decisions regarding individual tokens himself? Likewise, this includes questions regarding price development or liquidity.
  • Finally, auditing asks the question of who audits the token more closely: Can the investor perform his own auditing for crowd millionaire? Is this done by a third „trusted party“ or must the project team be trusted?

Distributed Periodic Table for the classification of tokens

The individual questions regarding the viewpoints can be summarized as follows: They can be centralized, decentralized or non-existent/relevant. Strictly speaking, 243 individual types of digital assets can be defined in this way. This set is called the Distributed Periodic Table, a periodic table for tokens. Of particular note, the Distributed Lab sees the following Digital Assets:

What types of tokens are there? An overview

  • Cryptocurrencies typically strive for a high degree of decentralization. Accordingly, all five points of view are centralized. Examples here are Bitcoin and Monero.
  • Digital currencies issued by states are exactly the opposite: all five aspects are centralized. Venezuela’s Petro is an example of this. But CBDCs such as China’s DC/EP are also part of this.
  • General digital currencies are more or less an in-between: some aspects, for example the validation of transactions, is organized in a decentralized manner, while others are managed by a central authority. An example of this would be Ripple.
  • Commodity-backed tokens or stablecoins are tokens with centralized governance, custody and issuance. An example from the cryptocurrency world is Tether, whose transaction processing is decentralized.
  • Security tokens, which are digitally securitized securities, have centralized governance, custody, and issuance, like stablecoins.
  • Accounting tokens are tokens for digital accounting. Governance, issuance, custody and auditing are centralized here. Examples here would be reputation or rating. We are talking about quantities that are not transferable, but for which an accounting classification makes sense.
  • Digital Collectibles are unique digital items in the form of non-fungible tokens that are of interest to a collector. They are non-exchangeable and unique. Governance and issuance is centralized. Best known example is Cryptokitties.
  • Utility tokens are tokens that can be used for more than transactions. They are necessary for interaction with certain programs, but in the long run boil down to the use cases of digital currency, security token or accounting token. Governance and issuance are also centralized here.

TokenD to determine the tokenised use cases

Based on the five points of view mentioned above, one arrives at different types of tokens. Conversely, one can ask oneself whether the set-up of the token fits the intended use case at all: For example, a cryptocurrency that calls itself „Bitcoin as Satoshi intended“ but has central governance would contradict itself.

As the token economy continues to evolve, new tokenized assets are emerging that cannot be easily transposed into this rough categorization. Cryptokitties were just the most well-known example. In this sense, the framework helps to name more use cases than the classic cryptocurrencies, security tokens and utility tokens.