It's All Tokens - Part 1

#newsletter
“Fletch” - Universal Pictures

Welcome to Issue #2!

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Let’s talk tokens.

I’ve had some discussions lately about which type of token might be best for a given project.

My answer is always “Start with NFTs!

But the standards can be confusing. So I’m building a cheat sheet you can use when you start to think about how each type of token works. Then maybe you’ll have a better idea which one might be right for your project.


But First, Vocab

Before we get started let’s agree on some vocabulary. Once this post goes live, I’ll break each chunk of this information down into a separate ELI5 post so you can search it later.

Token

It’s all Tokens! Whether you call it a Crypto Coin or an NFT, they’re all just different types of tokens.

ERC

This is an acronym for Ethereum Request for Comment. You’ll see this noted before a number for each type of token.

Every ERC standard starts out as an Ethereum Improvement Proposal (EIP). Much like a law in the government, before any EIP can be adopted, it has to be discussed and amended until it is the “rough consensus” of the community that this standard will be helpful to the protocol.

If an EIP is adopted and it deals with the “application level”, like a token standard, a wallet format or a name registry, it becomes an ERC.

The number after the ERC is just the order in which its original EIP was introduced. A larger number means that the standard was adopted more recently.

Fungible

Fully interchangeable. When items are fungible, they are completely indistinguishable from each other. In the physical world, local currency is considered fungible. A $1 bill is fully interchangeable with any other $1 bill.

This is true when it comes to the value of the bill. But because it is a physical object, there are still differences. The most obvious being the serial number on the bill. No two bills can legally have the same serial number.

So, in the real world, fungibility is measured on a scale based on what factor you’re comparing. In crypto, when we say something is completely fungible, we mean there is absolutely no difference between the item.

Royalties

Though they are not built into the standards, royalties are one of the truly revolutionary concepts of creating and owning NFTs. NFT royalties allow creators, collaborators, curators or anyone else involved with a project to be paid royalties on any downstream sale of the asset.

This means that an artist could continue to benefit from the resale of their earliest work, even if they aren’t discovered much later in their career. This opens up whole new concepts when it comes to releasing work. A creator could give away or sell a collection of NFTs at very low cost. If the creator then builds value or utility that can only be unlocked by owing an NFT, they’ve given that NFT value. Now they can earn revenue any time the NFTs change hands. This would happen naturally as people discover a need for the utility and sellers decide they might want to cash in or move on.

Up to this point, the biggest issue with royalties has been a lack of any standard to collect and remit them to their rightful owner. An NFT Royalty Standard, EIP-2891, was recently approved to correct this. But it’s not yet widely adopted. So NFT creators must still rely on marketplaces like OpenSea and LooksRare to manage their royalties in the near future.

Fractionalization

As individual NFTs inside certain collections have soared in value, the cost of owning one has put them out of reach for average collectors. To allow more people to participate in a community, some collectors have fractionalized their NFTs.

To accomplish this, they created smart contracts that lock up the original token and divide it’s ownership into a new collection of NFTs. Each NFT in this new collection then represents a small fraction of ownership.

This lets fractional buyers profit from increases in value, or to feel like they’re a part of the project. In some cases, owning a fractionalized NFT even allows access to some of the perks that come with holding the original.


Next Week

In the next issue we’ll cover ERC-20’s. And I’ll give you a brief history of the ERC-20 that’s so old school, it was an ERC-20 before ERC-20s even existed…

Bitcoin.

These aren’t NFTs. But they are one of the technological Lego bricks that web3 is built on.

See you next week!


You might be interested…

My Week in Web3 - May30 - June 3, 2022

What will the Alphas get? Take a peek!


Getting Meta

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