What is the reason for having to create tokens

Hello,
I have a question as to why do we have tokens to be built on Cardano (or any blockchain that supports smart contracts).
In fact smart contracts could be created with a certain functionality and a certain name with
ADA as a currency that is consumed for the “tokens”. Why do we have to create tokens with economic value that cannibalise the host blockchain and that you could buy with other currencies. Of course the fees would be paid in ADA but that doesn’t answer the question.

We have seen with etherum the creation of new tokens with the pure intention of pump and dump, or using Tether to pump Bitcoin in terms of dollars, or just creating a scam ICO like it happened with 80% of ICOs.

But on the other hand, we could have a new functionality without having a new currency.
We see this in real life economy for example with car insurance. The “smart contract” is that you pay a certain amount as insurance in dollars and you get paid a fixed amount in case of an accident. But the amount is not in “insurance tokens”, it’s in dollars. Or another example Amazon gift cards are denominated in dollars as well, not in “Amazon tokens”.

So are there really any substantial benefits to create tokens that outweighs the disadvantages?

Every token is free to define its own economic model… the most important characteristic of which is a supply. Unless you define tokens within the native currency of a blockchain, you can’t know the total amount of economic volume & activity that is within your particular business model, as opposed to that blockchain as a whole.

Without tokens, transactions and smart contracts will only see the amount of the blockchain’s native asset, without being able to see the purpose to which any asset may have been dedicated. When a user converts a native asset into a token, they are dedicating it to that purpose. If your business model doesn’t have or doesn’t require such a purpose, then you have no need to create a token.

An extreme example would be tokens that represent discrete ownership: like 1 token per object in the “real world” (or maybe online, but off the blockchain) with a limited supply. In an even more extreme example you might have only 1 of something, with its own unique token to represent that thing.

In either case these discrete objects could be bought, sold, and their ownership reassigned by smart contracts as well as ledger transactions using their representative token. Without that token capability, the smart contract (only having the native asset to measure) wouldn’t know about that ownership. You might get around the ownership issue by requiring “proofs” of off-blockchain ownership records but then you would be defeating the purpose of doing these transactions on a blockchain that supports tokens which can already handle the ownership proof for you.

Now generalise that idea of discrete ownership into a pool of assets representing the economy of your own business or means of commerce. All those tokens will be indistinguishable from each other, and will be unique from the native asset, and they will entitle the owner to participate in the system according to 1) the smart contracts that operate on your token, 2) the ledger for that token itself (supply & ownership), and 3) whatever smart contract creates the asset (in the simplest case, determining its buy/sell price in the native asset).

Without that token being unique from the native asset, you cannot manage value and most DeFi applications go out the window. For instance, to create a “stablecoin” as you have no doubt heard of, you would have to create and destroy tokens so that your tokens’ total value will roughly match the amount of collateral value that’s confirmed deposited into your financial application. How would a smart contract do that if the ada held by such a smart contract were no different than the 45 billion other ada out there?

Regarding the malicious uses of tokens, a truly decentralised system has to leave these issues to general ethics as well as the governing laws of the jurisdiction in which you operate. By default that means every blockchain user themselves has total responsibility for which tokens they buy and which smart contracts they participate in.

It’s sad that there’s no Wikipedia article on this subject but I’ve noticed that few writers yet are committing to these ideas: I spent a while looking for a “Why create a token?” article on Ethereum / ERC-20, the most popular token platform, and found nothing at all. Your question is a good one & I’ll bet other forum readers would be happy to supply more real world examples & maybe more educational links. :innocent:

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p.s. Some general reasons why you might need to create a token, with some ideas not mentioned above & a few more examples, in the second half of this article:

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Thank you COSDpool for your answer. In fact I tried to get my head a little bit around this and thought about a model where tokens only represent a certain amount of ADA but I couldn’t figure it out. Let’s say a car company wants to put it’s cars on the blockchain, then somebody has to block the value of the token on the blockchain in ADA. Who is it going to be? If it’s the car company, than they have to pay for the cars they’ve produced! Is it the purchaser? Than he should pay twice the price for the car: one for the company and the other to block the amount in the token. Yes some players bring external value and I can’t find any other way than creating tokens.

Though I don’t know if it is theoretically possible but it would be cool if tokens were to consume ADA for their value somehow… Imagine all of those Etherum tokens if they had to consume Ether for their value, Etherum would be more valuable today than Bitcoin…
But at this point for me it’s only wishful thinking and I don’t have an economic model where that’s possible.

Have a good Sunday!

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Thank you for the question. It is indeed non-trivial to answer this. I must say it is a question that is worth debating. In principle imagine for a moment that we are now building web3.0 where value will be exchanged and we have information highway where such value transaction can happen. In this case it happens to be the decentralized blockchain of cardano. Here only ADA tokens would be a valid currency but in principle if there is an automated conversion ATM next to the entry to this highway i might as well be able to pay in my currency which gets converted to ADA in the backend. So in principle this is the easiest way for anyone to use this highway. Now question is why would anyone use this service ? The reason is that business now can interact with any other third party who are offering their services on this highway, and we might want to avail of such services. Say a petrol pump chain offers their payment services via cardano Blockchain. They provide an SDK that allows me to integrate it into my car recharge card using this SDK and this costs me fraction of current complex payment systems via credit card / paypal etc. No where in this scenario should we be constrained to create our own tokens, because the gas recharge station is only interested in the end for getting its payment no matter in which currency. Thus from this standpoint, i think for each and every service creating a token is pretty useless exercise without any rationality. And if we can keep transaction as transparent as the above scenario, complexity of the system will be reduced and lesser friction for integration.

Now coming to the topic of how smart contracts can be distinguished from one another and whether token is the only way to do that ? Let us explore that in bit of detail.

Finally as i said in the example of gas station above, in principle it is service layer built on top of blockchain providing a specific value added service. And anyone who integrates it will have to pay for this service. The smart contract in the end will have some kind of unique identifier (TOKEN) which is kind of unique Domain/sub-domain for the blockchain that identifies the service provider. Just as we have now unique ID for the stakepools. That is all in my opinion that is needed. This token will be a proxy to the service being provided, but the underlying unit of value that is provided via this smart contract, can be be in ADA (native currency of Cardano). And when we need to identify the blocks created by this smart contract we simply look at this identifier on the blockchain and walla …we know which blocks are created using this particular service.

Enough of this spontaneous rant…happy that i wrote this …made things clearer for me …and hope to see some comments.

BTW taking ethereum as the reference will complicate things for no obvious reason. I am happy that I have stayed away from that ecosystem, where they have created unnecessary complications in the architecture. For good reason we should start our own reference architecture which cardano has so nicely already done …

Another point to note about tokenomics is: We normally would like to create a fixed supply of tokens for a particular product. In order to do this also we have to uniquely identify and issue tokens on the base platform. Without its own identity it would not be possible !

bye …

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@LKBHPool I understand what you’re saying about the gas station, it could offer its services via a smart contract for a certain amount of ADA and you don’t need a token.

But what can you say about car ownership? If a car company wants to sell its cars on the blockchain, for the car ownership to be registered on the blockchain, there has to be a token. You can’t simply register the car without a token representing that car, and that you can sell and buy. So I agree that you don’t need tokens for payment systems for certain services, but you need them to register ownership.

That being said, I’m not sure that still 90% of tokens that will be created will be useless, if not outright scams to begin with. The reputation of the whole community is at stake and there might be something to do about this, but I’m not the right person who could find a solution.

Please read the article i wrote earlier carefully…maybe read twice. I did mention the need of the token except the token is during the commitment of the contract to the chain, and not for anything else. So taking your case:

For car to be registered on blockchain you would need a smart contract. And as i said in my example, the identification of the smart contract needs the token, otherwise later when you have to search for the contracts executed for cars by this particular contract you would not have any identifier. The identifier is the token. At least logically that is how i would think of it.
Once car is registered on the chain and user has made the payments, if he asks some kind of certificate of uniqueness for his vehicle (think about expensive cars like Porche, lamborg, etc.), then this certificate would be a TOKEN that can be issued. And this unique certificate will then carry a value tied to the smart contract executed on chain.

And when the smart contract is executed it can take input as ADA as well. *For the user of the smart contract he does not need to know about the token at all…that requirement is just a false cook up of the earlier chains like ethereum.

Now you can argue further as follows. Once you create a value added service like a debt instrument on top of cardano (like a bond contract), we need to give the user a certificate of issuance of the bond. That bond instrument can be called a token, and can take up a different valuation which will be derived partly from the underlying instrument (ADA) or something else (time, etc.). So now in order to give the user something to hold in return for the money that they have deposited. we issue a CERTIFICATE or TOKEN. That has hardly to do anything with the currency or payment method. It is just a derived value and a representation of the same. That is what you probably are confusing with.

Similarly NFT tokens are another example. When we translate the existence of real world objects like painting, diamonds and other unique assets and want to issue a CERTIFICATE or TOKEN for this uniqueness, we use the immutability of the distributed ledger called blockchain for this purpose. We kind of execute a small contract that commits the object properties to the chain, and then issue a TOKEN to represent this transaction. In this case also the TOKEN represents some sort of value because it represents the real world object and people can now not easily fake the identity of the article (unless it is easy to form replica etc.), because the smart contract will not allow that.

Does this make sense ? Feel free to question me…

The only reason I can come up with- is an honest interest in creating, developing tokens. If you have something pragmatic in mind. Abandon this Idea. You won’t get investors you won’t get the interest of the public. The good old time of crypto have long since gone. It’s a new decade, and there should be something new. As for BTC, now it’s just an internet currency and the bet you can do is to find a good exchange website like BTCBIT.net. Hope it helps.

Hi Korry, it is an interesting comment. Do you have some more solid reasons to back your case, instead of just shooting blank in the air ? Would be keen to know your experience in this field so that we have a fair idea about you and who we are talking to.

In cardano we have a fair amount of knowledge about macroeconomics etc. to make certain decisions. Maybe you can explain your thesis. We do not mind criticism