DESIGNING FUNCTION, UTILITY AND PURPOSE INTO YOUR CRYPTOCURRENCY

All men are created equal, but all cryptocurrencies sure aren’t. Cryptocurrencies come in all shapes and sizes, and while they may all be based off blockchain technology, many tokens are imbued with unique functionality. And it’s for good reason; a token that possesses functions can dodge being labeled a security. Today, we’ll break down the different uses and utilities of some tokens, and why avoiding the security tag matters.

There are hundreds of cryptocurrencies with more coming out every day (see our ICO Calendar), but they can be divided into a few broad categories. Some intend to be a store of value; some want to be a currency; others use tokens as an in-app reward. Some, like DogeCoin and Fuck Token, seemingly exist for no reason at all.

Bitcoin, the first and biggest in the space, is a peer-to-peer currency. Like many other coins, Bitcoin is the reward for mining. Many subsequent coins were asset-backed tokens. Why does this matter? Because that sounds an awful lot like a security, and the shadow of SEC regulation is currently looming over the cryptocurrency space. With a crackdown on wild  potentially coming, many tokens have taken steps to avoid being labeled securities. One of the best ways to do this is by including a functionality in the issued token. We’ll first discuss one of the most basic uses of a token: voting rights.

UTILITY: VOTING RIGHTSICOs

Aragon is a popular token that launched earlier this year, aiming to allow organizations to run through Ethereum. Among Aragon’s creative uses of blockchain were how they implemented voting rights through tokens. Other coins portray themselves as a company with coins held analogous to voting shares of stock. Lykke exemplified this. The Norwegian word for “luck,” the Lykke team built a product for improved crypo and stock exchanges. One coin is equivalent to one vote. This has flaws; a few whales, or holders of large amounts of the currency, could manipulate a poll. The idea has been floated that the coin would use a range voting system, where users voice their feelings on an issue from 1 to 10. This allows a currency to account for how strongly users feel on an issue.

In a traditional voting system, a user who hates an issue with a passion is counted equivalently to one who checks the box without knowing what’s going on. Range voting systems alleviate this and allow development teams to read shades of gray. it’ll be interesting to see if more cryptocurrencies with voting systems incorporate this in the future.

UTILITY: IN-APP REWARD

Using a token for an in-app reward is another method teams are using to avoid being labeled a security. Basic Attention Token and Filecoin are two recent examples. Filecoin, which generated buzz after its recent record-breaking ICO, is a storage blockchain project. Users with spare storage are paired up with those who need it.

You pay for someone else’s spare storage space in Filecoins. Filecoins are in turn dispensed to those who host other people. This way, Filecoin avoids being labeled simply an asset-backed token, which would fluctuate with the company’s valuation and reputation.

Basic Attention Token is the currency of use in the team’s new Brave browser. Annoyed with popular browsers like Chrome and Firefox, the team set out to create a better version. Brave emphasizes customer safety and anomity. The actual token is a unit of account for advertisers, publishers, and users on the platform. The BAT website explicitly states: “The token is not a digital currency, security or a commodity.” No team wants to be the victim of an over-zealous SEC crackdown, so usage of tokens within the app as a reward or as a unit of account gives the token an actual function.

UTILITY: ACCESS TOKENS

Often imitated but not surpassed yet, Ethereum is still the most valuable smart-contract cryptocurrency. Ethereum’s Smart Contracts are an obvious example of functionality in a token. Users can implement Ethereum’s turing-complete scripting language to fulfill conditions for work done, for example. Ethereum is also a useful platform for new ICOs to add functionalities to their tokens. Ethereum’s nifty “inheritance” feature makes it easy for coin creators to duplicate certain parts of their contracts. The in-app functionality of Ethereum and its many imitators gets around the security label.

UTILITY: CUSTOMIZATION OF VALUE

Lots of tokens come with contracts and voting rights; very few are their own miniaturized exchanges. Bancor is, and its tokens are so unique they reside in their own category. We’ve already written in-depth about Bancor on this site, but the Keynesian-inspired currency allows users to hold multiple coins in a token. A user can easily create and customize the distribution of a Bancor. One Bancor could be 50% Bitcoin, 30% Dash, and 20% Ripple. Some teams use tokens as access into the project. With Bancor, the tokens are the project, and their ability to hold multiple currencies has drawn comparisons to ETFs and mutual funds. Different Bancor could hold different value, which might give the SEC pause before considering it a security.

CONCLUSION

There’s a myriad of ways a coin can implement functionality within. Thanks to easy-to-use tools like Ethereum and Ardor, the functionality of a coin is limited only by a team’s creativity. And their desire to avoid tangling with the law; until the SEC clarifies its stance on cryptocurrencies once and for all, teams should continue to be mindful of being labeled a security.