One of the big, frequently discussed ideas of crypto is that it enables creators and communities to build their own internet-native economies. A key component of these economies is tokens, which got a bad rap during the ICO (initial coin offering) boom a few years ago. Yet tokens are the fundamental unit of value in crypto economies. They are (as has been argued by others too) a breakthrough in open network design, because they are a mechanism for incentivizing open network participants, including users, developers, investors, and service providers.
But what IS a token exactly? At the simplest level, tokens are just code that lives on a global peer-to-peer network called a blockchain. But unlike other forms of money, they’re digitally native, programmable, and secured by one’s crypto wallet and private key. Cryptocurrencies are just one type of token.
There are two main categories of tokens: fungible (e.g., interchangeable) and non-fungible (e.g., unique). As more creators and communities build their own crypto economies, fungible tokens will be used to exchange goods, store value, and make collective decisions. Meanwhile, non-fungible tokens (e.g., NFTs) will be used to create new business models centered on collectibles, rewards, achievements, and more — giving people a sense of identity, status, and belonging.
The gaming industry knows this well. Games like Fortnite leverage fungible tokens (VBucks) and non-fungible tokens (skins, cosmetics, emotes, etc.) to create a rich internet-native economy. In 2020 alone, consumers spent approximately $54B USD on in-game purchases for virtual goods like livestock in FarmVille, skins in Fortnite, and extra lives in Candy Crush. But this is just the beginning of what’s possible.
All the best crypto protocols, social apps, online communities, and marketplaces will need to deeply understand the interplay between fungible and non-fungible tokens to create their own internet economies. But why do we need internet-native economies in the first place?
Most traditional economies weren’t designed with the internet in mind. As a result, modern economies have a number of issues:
These limitations reduce economic growth and amplify inequality. As more economic activity moves online, we need internet-native tools for building productive economies. Many people don’t have a bank account but do have a mobile phone with internet access.
This is where cryptonetworks come in. They provide the cryptographic (e.g., security without a third party) and economic building blocks for modern forms of production, distribution, trade, and consumption.
Let’s start by going deeper on fungible vs. non-fungible tokens.
Traditionally, money has served three primary purposes:
A to facilitate trade
medium of exchange
A to preserve wealth over time
store of value
A to provide a standard measure of value
unit of account