A key part of researching the Tokenomics of a project is understanding what the classification and potential use cases of the token/coin is.
A THREAD
1 / There are 3 broad categories of cryptocurrency tokens:
1 - Currency
2 - Utility
3 - Security/Investment
There are many subcategories and each is, in itself, quite complex.
2/ There is a lot of nuance regarding how tokens are classified, by whom, and why that matters from a legal and regulatory standpoint.
We will explore this in more detail later but for now, let’s take a look at each category in its simplest terms.
3/ Currency
The best known (and many say original) cryptocurrency is
The Whitepaper begins:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
5/ A cryptocurrency is one that was created as a means of payment outside of the issuer of the currency.
Although is mined (we will get to this later too!) and mining pools can create large centralized groups of issuers, Bitcoin itself is and has always been decentralized.
6/ For this reason, it’s difficult to classify any party as an “issuer” and because Bitcoin can be and is used as a payment method, the classification of “currency” makes the most sense and is generally agreed upon.
7/ Utility
A utility token is created with a view of offering holders/investors something in addition to to being able to use it as a means of payment.
8/ While all cryptocurrencies on some level can, and usually are, used as a method of exchange for goods and services, utility tokens have additional non payment related use cases.
9/ For example:
- it is native to the Ethereum platform and required to access and run Dapps as well as to reward miners for work they perform to run and secure the network.
10/ - used to purchase membership on the platform, to reward investors who stake their tokens and with more potential use cases being possible in the future, such as having utility on a trading bot platform.
11/ - one of many “exchange based tokens”. BNB is used to get discounts on trading fees on Binance, has many trading pairs, is used for participating in IEOs, as a payment method, and as gas for the Binance Chain and the Binance DEX”
12/ Security/Investment
The crypto market in general has seen anything being branded a “security” as a huge negative in the past.
During the major ICO era of 2017/18, the SEC issued a cease and desist letter to the Muchee ICO for being an unregulated security.
13/ In the time that’s followed several large fines for selling an unregistered security have been issued, including for Telegram and their ill fated token.
14/ Things are changing however and it’s understood by many that institutional money can play a huge part in driving widespread adoption of the crypto market, to the benefit of the market as a whole.
15/ Being classified as a security (a token or asset that passes the “Howey Test” which we shall discuss in future threads) means the token will be regulated and regulation tends to be a prerequisite for institutional money to invest.
16/ Security tokens have been in the news lately, with receiving clearance from the SEC to raise funds in the first SEC registered token IPO.
17/ Conclusion
Understanding the broad classification of a project’s token will allow you to better understand both the legal and regulatory framework that may affect the token as well as the primary and/or secondary use cases.
18/ This will tell you a lot about the path the token needs to follow to successfully increase adoption and value in the future and whether, in fact, the planned use case is likely to be useful or even necessary at all.
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