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1. Tokens: The Atomic Unit of Web3 Tokens are cryptographically secured digital certificates that are collectively managed by all nodes of a blockchain network or similar distributed ledger. They can be seen as the atomic unit of Web3. In their simplest form, they require just a few lines of code. Tokens are rights management tools that can represent anything from a store of value to a set of permissions in the physical, digital, and legal world. They are publicly verifiable and globally valid digital certificates. Their effect on the financial world might ultimately be similar to the effect the Internet had on the postal system. by Shermin Voshmgir
2. Beyond Digital Assets: Web3 Tokens as Rights Management Tools Digital Rights Management Web3 tokens can represent more than just digital assets. They can be thought of as digital rights management tools that can represent the ownership of a physical asset, voting rights, management rights, or access rights such as a digital subscription or a membership. Historical Context Though the concept of tokens is not new, Web3 takes them to another level. Early societies used tokens as a way to represent value or grant access, with shells and beads likely being among the first tokenized objects. Over time, more sophisticated tokens were developed, such as coins, paper money, vouchers, stock certificates, casino chips, gift cards, entry or transfer tickets of any kind, and membership passes or ID cards4each serving a distinct purpose but sharing a core principle: representing various rights, identity, or values. Any type of token always requires a level of anti-counterfeiting protection to maintain trust in the system they are part of. Before the emergence of blockchain networks, physical and digital tokens were managed by centralized authorities that provided such security mechanisms, regulating the creation, distribution, and verification of the respective token. Without these security measures, such as watermarks or specific materials, fraudsters could easily create copies of those tokens and undermine their value. For instance, a central bank manages the issuance of currency, including anti-counterfeiting mechanisms; event organizers issue tickets to concerts or performances, which include anti-counterfeiting measures. In digital systems, tokens can grant access or permissions, such as when a web browser uses a session token to maintain a user's login status across a website. Similarly, QR codes can represent anything from boarding passes to access rights for various services. Such computer tokens, including their security and anti-counterfeiting mechanisms, are managed by Web2-based systems that rely on centrally controlled and private server infrastructure.
3. Web3 Tokens: Publicly Verifiable Digital Certificates Global Validity Web3 tokens are publicly verifiable and globally valid digital certificates that transcend the boundaries of established certification authorities. Consensus Security Their validity is secured by the consensus mechanisms of the blockchain network upon which a token has been issued. Anti-Counterfeiting Consensus mechanisms of blockchain networks are designed to provide a native anti-counterfeiting mechanism for token transfers over the Internet. Bitcoin Innovation Bitcoin's Proof-of-Work was the game-changing innovation because it introduced a native anti- counterfeiting mechanism for digital values over the Internet and subsequently paved the way for other blockchain networks and Web3 networks to emerge. Web3 tokens do not manifest as digital files; instead, they appear as an entry in the ledger and are mapped to a blockchain address, which represents the blockchain identity of the token holder. They are only accessible with dedicated wallet software that communicates with the blockchain network and manages the public-private key pair related to the blockchain address, with which one can be authenticated as the owner or custodian of the token by all other network participants. If the token represents an asset, the owner can initiate the transfer of the token by signing with their private key. Similarly, if the token represents an access right to somebody else's property, the owner of that token can initiate their access right by signing with their private key. The same applies to tokens that represent voting rights or management rights.
4. Evolution of Blockchain Tokens Protocol Tokens The first blockchain tokens were the native tokens of public and permissionless blockchain networks4 also referred to as "protocol tokens." In the very early days of crypto, each blockchain network only had one token, which served only one purpose, and that token was part of the incentive scheme of blockchain network participants. Smart Contract Tokens The Ethereum network introduced a much simpler form of issuing tokenized assets using smart contracts, making it particularly easy to issue tokens with a few lines of code without the need to create a dedicated blockchain network. Fungible Tokens The majority of tokens issued on the Ethereum network in the first years of its existence were fungible tokens. Non-Fungible Tokens Over the years, more complex token standards emerged, with special properties and more complex attributes and behaviors attached, paving the way for a wide array of non-fungible tokens (NFTs). The first wave of NFT use cases emerged around the collectibles and art world 4first in 2016 and then again in 2020/20214 which is why many people today still reduce the concept of NFTs to digital collectibles and digital art.
5. Properties of Tokens Embedded Rights Property, access, governance, or information rights Fungibility Interchangeable or unique Transferability Transferable or identity-bound Minting Event Creation process of tokens Expiry Event Permanent or time-limited Tokens can be designed with different properties that determine how they function and influence their potential use cases. Embedded rights determine what the token represents - property rights tokens allow ownership over assets, access rights tokens grant permissions to use a service or resource, governance tokens offer voting rights, and information rights grant access to certain data. Fungibility determines whether tokens are interchangeable (like Bitcoin) or unique (like NFTs). Transferability can be restricted, as with identity-bound tokens tied to a person's identity, or permitted under specific conditions. The minting event refers to how tokens are created, while some tokens have expiry events ("burning") and others remain in circulation indefinitely. For fungible tokens intended as a medium of exchange, stability mechanisms may be important, and questions of supply and distribution define the economic sustainability of the network.
6. Non-Fungible Tokens: Beyond Digital Art Unique Digital Assets The first use cases of NFTs that gained traction revolved around crypto-collectibles and crypto-games. However, the intellectual property rights of any other type of unique digital content, such as social media posts, books, music, and videos, can also be represented by NFTs. The same is true for scientific papers that are published on the Internet. Unique Real-World Assets NFTs also allow the tokenization of unique investments tied to physical assets, such as a unique work of art, the deed to a real estate object, or an investment in a solar park. Asset Transfer Tokens When someone passes away today, their assets often need to be split between multiple heirs according to their notarized will. This involves considerable bureaucratic overhead and coordination costs, especially if the heirs live in different countries. Once Web3 infrastructure is more broadly adopted by public and private institutions, NFT-based asset transfer tokens managed by a blockchain network could allow for a much smoother transfer of tokenized and fractionalized assets created in the process of a will. Access & Usage Tokens A non-fungible token can replace keys and tickets. Tokens can certify any type of access right or usage right tied to the property rights of another person or institution (car sharing, home sharing, office sharing), any event, public transport, or Internet-based service. Although NFTs gained significant attention due to their ability to tokenize unique digital content such as artwork, collectibles, and virtual items in online games, their potential extends far beyond the art world.
7. Identity Tokens, Certificates, & Reputation Personal Attributes Anything that uniquely ties to the attributes of a person, object, or institution can be represented as a non-fungible token. Credentials Licenses, degrees, voting rights, wills, tickets, loyalty tokens, copyrights, warranties, medical data, or a supply chain certification verifying the provenance of an object. Global Verification A diploma can be issued on and collectively managed by a blockchain network without needing to be translated or manually notarized. Privacy- Preserving The token can serve as a container for the attestation of identity-related information without revealing what is being identified.
8. Advanced Cryptographic Techniques for Tokens Zero-Knowledge Proofs Zero-knowledge proofs cryptography allows for the validation of information without revealing that information with the verifier of that information. Ring Signatures Ring signatures can be used to obfuscate the identity of token owners, combining a group of partial digital signatures from various transactions sent by different users, to form a unique signature that is used to sign a transaction. Multi-Signatures Multi-signatures allow the creation of a vault with multiple locks and keys and assigns the keys to multiple parties. They also allow the creation of a vault mechanism that requires only some portion of these keys to open the vault. Even if one of the keys is duplicated, the attackers are not able to open the vault. Threshold Signatures Threshold signatures allow an arbitrary group of signers to construct one signature, as long as there are sufficiently many of them. They are more efficient, because almost all the calculation can be done by the signers before submitting it to a blockchain network. Schnorr Signatures Schnorr signatures are based on the Schnorr signature algorithm, which is known for its simplicity, is efficient, and generates short signatures.