Do Your Own Research: The Periodic Table of Tokens
In the last article in the series, we highlighted 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, which is why 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. You can read Part 1 of the Do Your Own Research series here.
(De)centrality as a benchmark for token valuation
To distinguish between different digital assets, the team behind Distributed Lab assumes that a digital asset system can be managed under five aspects (governance, custody, issuance and distribution, transaction processing and auditing). These five aspects are:
Governance, according to Distributed Lab, includes five different sub-aspects. A possible KYC regulation as well as any contact with authorities are just as much a part of this as 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 have to Bitcoin Pro transfer money to the project behind the token or deposit crypto into an escrow account. In the same way, the withdrawal process is also part of the process.
Issuance includes the creation and distribution of tokens. In the case of cryptocurrencies, the issue 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. In addition, 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? This also includes questions regarding price development or liquidity.
Finally, auditing raises the question of who audits the token more closely: Can the investor carry out his own auditing? 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 on the aspects can be summarised as follows: they can be centralised, decentralised 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. The Distributed Lab sees the following Digital Assets as particularly worthy of mention:
Cryptocurrencies typically strive for a high degree of decentralisation. Accordingly, all five points of view are centralised. Examples here are Bitcoin and Monero.
Digital currencies issued by states are exactly the opposite: all five aspects are centralised. Venezuela’s Petro is an example of this. But CBDCs like 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 organised in a decentralised way, while others are managed by a central authority. An example of this would be Ripple.
Commodity-backed tokens or stablecoins are tokens with centralised governance, custody and issuance. An example from the world of cryptocurrencies is Tether, whose transaction processing is decentralised.
Security tokens, i.e. digitally securitised securities, have centralised governance, custody and issuance, just like stablecoins.
Accounting tokens are tokens for digital accounting. Governance, issuance, custody and auditing are centralised here. Examples here would be reputation or rating. It is 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 centralised. The best-known example is Cryptokitties.
Utility tokens are tokens that can be used for more than transactions. They are necessary for interacting with certain programmes, but in the long run they boil down to the use cases digital currency, security token or accounting token. Governance and issuance are also centralised here.
TokenD to determine the tokenised use cases
Based on the five points of view mentioned above, we arrive at different types of tokens. Conversely, one can ask oneself whether the token’s set-up 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.
With the ever-evolving token economy, new tokenised assets are emerging that cannot simply be transferred into this rough categorisation. 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.