1.1 The Business Value of Blockchain

Blockchain provides a solution to achieve trust through technology in two aspects:

Tamper-proof The block is produced by reaching a consensus from a large group of validator nodes, therefore tampering with on-chain data requires altering the ledgers of the majority of nodes, which makes the cost of malicious behaviors on the blockchain so high that no sensible person would consider doing that. Traceable Traceability means that the process of modifying and transferring information on the chain is fully recorded. It is traceable from the current state of information to the state when the information was first recorded. If the information is fake, then the process of forgery will be traced back to the moment when it is recorded on the chain.

There are many validator nodes on the blockchain network. The trust is realized by the consensus among most of the validators and not based on any single honest node. The blockchain governance model punishes dishonest nodes by making the cost of malicious behaviors higher than the benefit they bring.

Given the need to maximize the interests of blockchain nodes and the consensus of the majority of nodes, a state of competitive cooperation is formed, which is the basis for the blockchain to provide technical trust.

This state of competitive cooperation is actually the business environment we are in today.

Information asymmetry is often the reason why sometimes your business partners make extra profit, which is not a healthy model. In an environment where information is fully transparent, business partners can only gain more profit by working together to increase the market value of the entire industry. This is the business value provided by the blockchain.

1.2 Basic Token System of Blockchain

Business cooperation is about profit, and the distribution of profit needs to follow the “ledger” on the blockchain. There are two ways to guarantee the trustworthiness of blockchain:

1. Legal guarantee: the law guarantees that profits are distributed according to the ledger; 2. Economic guarantee: profits are distributed as the transactions are being recorded in the ledger.

The nodes of public blockchains are from all over the world, and it is difficult to have a universally-applied legal system across different jurisdictions. As a result, the only viable option is economic guarantee. When it comes to accounting results and profit attribution, we need a technical tool to ensure “atomicity” and “consistency”. This is where token technology on blockchain platforms comes in.

Token has two functions:

• As a means of measuring economic value to ensure business behaviors;

• As an economic tool for measurement during the operation of the blockchain.

Accordingly, there are two scenarios in which the public chain token is used to distribute profits:

• The blockchain nodes record the transactions on the chain to obtain a corresponding amount of rewards;

• The blockchain serves as a platform for measuring the business behaviors and needs on the chain.

For public blockchains, technical prowess aside, the biggest difference blockchain projects bring is the design of different governance models, which implement different consensus algorithms based on the node network assumption. The token design needs to serve the governance model and the consensus algorithm.

The consensus algorithm serves the governance model. For public chains, there are mainly PoS and PoW:

• Based on the governance assumption of the PoW consensus algorithm, the node receives the equivalent return based on the work they do, which is clear and straightforward;

• Based on the PoS consensus algorithm, nodes participate in governance and come to a resolution by voting, which requires an additional vote-counting tool (stake). In the design of the blockchain governance model, the stake has value, and nodes participate in governance through staking, which will be used as the cost of malicious behaviors. Since governance solutions and governance results also need to be recorded on the chain, this is also a type of token.

In this way, there will be three types of tokens in the blockchain using PoS: node profit token, business activity token, and governance token. In fact, node profit is also a type of business activity, so they can be integrated into one type of token.

1.3 What is the dApp Token Model

The blockchain serves those who can maintain a benign competitive environment and therefore can bring about countless dApps with business models. However, there are only a limited number of blockchains and dApps often issue different types of tokens. Why? We can see it as a competition between business models and fundraising efforts.

Traditional investment and financing activities need to be supported by practical business models and investment logic. The blockchain uses the token technology and the token value reflects the value of the project in turn, which lowers the threshold of investment and financing. There have been many new “investment and financing logics”, which is what we often say, the secondary market comes first. For example, at the end of the day, ICO is actually a form of crowdfunding under loose or no regulation.

On the one hand, the secondary market allows more retail investors to invest and lowers the threshold for investment; on the other hand, given the lack of operational data support from business models, it is impossible to tell apart investors and speculators so there are potential risks that the investment and fundraising market might be undermined (for example, by malicious fundraising behaviours).

The tokens of many dApp projects are designed for ICO and now many countries are putting policy restrictions and legal compliance requirements on it.

1.4 Utility Token

So far, the most common application scenario of blockchain is in the financial sector. The existing economic system is mainly based on fiat currency. Therefore, the token system and the fiat currency system need a “bridge” to anchor their value. This type of bridge is backed by fiat currency and also supports tokens, thus it can be called an application that provides token service. This type of token is mainly a stable digital currency.

1.5 Summary

At present, blockchain tokens can be put into the following three categories:

• Governance token: A governance tool for the PoS consensus algorithm that has the characteristics of tokens and uses token technology.

• Utility token: A value tool within the blockchain system that serves the business applications on the chain. Utility token is usually used as a bridge between the blockchain-based economic system and the existing economic system, such as stable digital currency.

• Security token: A value tool designed to serve the business model of the on-chain applications and the secondary market.

Compared to existing economic tools, the utility token is similar to the fiat currency of the economic system; security token is similar to the investment instrument such as securities and equity; application token includes the stable digital currency, and is mainly to link the economic system and the tokenomics system.

In a complete blockchain system, the above three types of tokens are indispensable, and their use scenarios complement each other. At the end of the day, only the tokens that people can actually use are the tools that have real commercial compliance value. For each type of token, it is necessary to think about whether its issuance and business model make sense.

In the next article, we will talk about the Ontology dual-token model.