How Digital Assets Enrich The Market: Various Types of Tokens And Their Use
The world of digital assets is constantly evolving along with the regulatorylandscape in Germany and aroundthe world. Thecrypto market has recently hada tumultuous few weeks,but despite the road bumps, the technology behind digital assets is still growing fast and canbenefit every business. To take full advantage of digital asset offerings, it's crucial to firstunderstand the differences betweenkinds of tokens and recognize their potential. In this guide, we aim to provide an overview of what digital assets are, their advantages, types andcommon use cases.
What are Digital Assets?
Digital assets (also called crypto assets) are digital representations of value units that are not issued by a central bank and can be used for purposes such as payments or investments. These value units (tokens) can be digitally sold and traded via blockchain, a tamper-proof decentralized database.
Tokens are value units that can be digitally represented, sold and traded on blockchain.
Once labelled as a gamble for tech enthusiasts and speculators, crypto assets are increasingly becoming an interesting asset class for professional and institutional investors as well. According to Fidelity Digital Assets, seven out of ten institutional investors are considering investing in digital assets. Similarly, research by London-based Nickel Digital Asset Management found that 85% of institutional and wealth managers now have teams looking into crypto and digital assets.
Several reasons are attributed to this development. First and arguably the most influential is the advancement of the regulatory framework for this asset class, such as the introduction of crypto custody licenses and the passage of the Electronic Securities Act by the German Bundestag.
Another reason for the increasing acceptance and demand in the market is the move of the big corporations and investor giants. BlackRock has recently announced their intention to invest in crypto assets. Morgan Stanley has had a portfolio offering of blockchain-powered investment products since 2018. Central Banks in the UK and China have expressed interest in cryptocurrencies and digital assets as well.
Digital Assets are radically changing the market
The blockchain can be used to digitally represent, issue and trade property, assets, contracts and utilities in the form of tokens. For this purpose, an asset, contract or right is linked to a digital representation - the token - on blockchain, through which the ownership of the token is regulated. In addition, every transaction is recorded irrevocably and tamper-proof on blockchain, adding a layer of security and transparency. These transactions can be viewed by all participants at any time.
More and more industries are recognizing the benefits of digital assets and tokenization and are looking into ways to use tokens for their purposes. Whether it is raising growth capital for projects and companies or digitally creating and settling contracts - there is a suitable token type for just about every use case. These range from digital currencies and vouchers to representations of real tangible assets.
The most common types of tokens are:
- Asset Token
- Non-Fungible Token (NFT)
- Security Token
- Smart Contracts/ ERC-20 Token
- Social Token
as well as Utility Token and Status Token.
Which type of token is suitable for which use case?
Just because digital assets and tokenization have a number of advantages, does not necessarily mean that they are suitable for every use case. This overview provides first orientation of different types of digital assets:
- Asset Tokens could be an option to digitally represent real economic goods (e.g. precious metals) and make them tradable.
- Cryptocurrencies (various types of coins, payment/currency token, privacy coins and stable coins) are suitable for operating a platform or blockchain, introducing means of payment or raising venture capital via ICO in exchange for company shares.
- NFT are predestined for trading unique items (e.g. in the form of auctions) and are particularly well suited for unique assets, as well as digital collectibles (e.g. from art, music or sports), in-game objects, digital identities/utilities and domains, as well as objects in the metaverse.
- Security tokens are especially suitable for growth financing in a (BaFin) regulated environment, as well as for targeted financing of individual projects (e.g. real estate objects and tangible assets) and financial products (e.g. securities/funds), where investors/token holders should be entitled to similar rights against the issuer as with conventional securities (e.g. claims to dividend-like payments, participation rights or interest). Since they allow fractional ownership, they are well-suited for financing of large sums via a group of investors.
- Smart contracts are suitable for any form of digital contract and are often used in combination with one of the token types presented here.
- Social token/ Personal token offer public figures and prominent entrepreneurs/founders the opportunity to let their fans and investors share in their (personal) profit and/or life for a certain period of time in exchange for money.
- Utility token are suitable for operating a platform or offer a product/service to issue vouchers (e.g. entitle access to certain features). In this context, Status Token are suitable for loyalty programs, online games, forums and other platforms where individual participants want or should have a better position, reputation or positioning.
Since there are overlaps between the token types in some aspects, when selecting a suitable token type for a project, the question should also be asked whether and to what extent the asset is regulated. While Initial Coin Offering (ICO) takes place in an unregulated environment, the issuance of security tokens (Security Token Offering, STO) is subject to strict laws and regulations.Therefore, before choosing type of token and form of tokenization, it is always advisable to do thorough research and talk to experts on a specific use case.