Token Functions

Tokens serve a wide variety of functions on the protocol, platform, or app that hosts them, and can confer holders categorically distinct rights. Such rights and functions have wide-ranging implications for users, token holders, token buyers (if applicable), token issuers, and businesses built on top of the token economy.

The ability to astutely imagine how a token will change in value in different scenarios depends in part on a clear understanding of what functions or rights a token confers. Understanding a token’s function involves answering questions like: What does the token do on the platform itself? Why do users want or need it? Is the token intended to capture or reflect total value flowing through the system – and, if so, how? Questions concerning token function are additionally a key component of cryptoeconomic design more broadly, along with considerations of token supply, circulation, and system governance.

Smith + Crown proposes the following framework for thinking about token functions:

  • Payment: the token is the only or a uniquely privileged method of making payments or transfer value on the host platform.
  • Contribution: the token gives the holder the right to perform work or offer services in exchange for compensation.
  • Feature Access: the token gives the holder access to premium features or capabilities on the platform, including membership and discount features.
  • Governance: the right to influence development, direction, and management of the host platform.
  • Revenue-Sharing: the right to a portion of revenues, fees, profits, or other value flow through the platform
  • Asset backed: the token is redeemable for or represents claims to an underlying physical or digital asset

Token functions and rights are commonly not mutually exclusive; for example, the same token may both grant holders both access to exclusive discounts (access rights) and confer suffrage in protocol change decisions (governance rights.)