Native tokens on Cardano
The possibility to issue tokens on Cardano increases the utility of the network. It will bring network traffic and new users. After the Mary hard-fork, Cardano will become a multi-asset ledger. Let's have a look at what it means and what it brings to the Cardano ecosystem.
What are native tokens?
Cardano’s security and decentralization are related to ADA coins. ADA is the cryptocurrency of the Cardano network and you can stake it. You can also send ADA coins from address to address. Besides ADA coins, it will be possible to issue other tokens that will have similar properties as ADA coins. It will be possible to send them from address to address. The whole history will be stored in the blockchain and nobody will be able to change it. Regarding decentralization, sending ADA coins or tokens is basically the same process with the same properties. It will be possible to create a transaction that will transfer more assets at once. For example ADA coins and a few tokens.
Issuing tokens is a centralized process since it is a decision of a single entity or a group of people. Once tokens are issued, operations with tokens will be decentralized in the same way as it is with ADA coins. It means that once you hold a token it is only yours and nobody including the issuer can take it from you. The issuer of tokens needs to provide a token name, token symbol, icon, and amount. In addition, Cardano’s wallet address must be specified since the protocol needs to know where to insert coins.
For example, Gene Simmons could issue tokens for fans of the rock band KISS. The name of the tokens can be “KISS coin”, symbol “KISS”, and the amount 666,000. He can use his address hence he will be the owner of all KISS coins in the beginning. He can then send coins to other addresses. For example, he can sell them directly to people or use a decentralized exchange to sell them on the open market.
What will be the value of the KISS tokens on the market? The Cardano network does not care about the value of tokens. It is the responsibility of the issuer to provide some value to tokens. The value can be high or very low. It can even be zero but in this case, the question is why would people pay transaction fees. It makes sense to provide some value to issued tokens but it is not a necessity. For example, Gene Simmons can guarantee free entrance to his concert or party to all holders that have 666 tokens. In addition, he can promise to meet with coin holders personally or prepare a surprise for them.
How difficult it is to issue new tokens
You have probably heard about ERC-20 tokens that can be issued on Ethereum. To issue and use them, you need to use smart contracts. In the Cardano ecosystem, tokens do not need smart contracts. Cardano supports tokens natively. It means that you do not need to use a smart contract for transferring tokens from address to address. It works exactly as it is with ADA coins. Users will be able to issue, send, receive and burn their tokens.
New tokens can be issued via the Cardano command-line interface or a special graphical interface that isolates users from the command line. Both official Cardano wallets Daedalus and Yoroi will support tokens. Users will be able to receive and send tokens.
In the beginning, it will not be possible to change pre-set monetary policy. In time, the team will extend the possibilities and issuers will be able to specify conditions for minting new tokens or burning them. It will be even possible to specify an entity that is to be responsible for the asset supply.
Using tokens as native assets brings a few benefits. It will be much easier to create a decentralized exchange or use tokens in decentralized applications. Developers do not need to deal with smart contracts when they want to operate with tokens. It will be easier to create a smart contract that works with more tokens. Swapping ADA coins and KISS tokens will be actually a very simple operation. Another advantage is that sending native tokens is cheaper than using smart contracts for this very basic operation. High fees are killers of usability. In the Cardano network, fees will remain low.
When other features like voting mechanisms are released then it will be possible to use them together with tokens. It means that when a DeFi project needs voting it can use the one that will be already available for ADA coins. It will be the same with Atala Prism. When a token issuer will need to work with the identity of users it will have it right away and seamlessly.
Can a database be used for native tokens instead of blockchain?
Someone would argue, a database can be used instead of a blockchain. Would it be really better? It depends on many details. At the moment, the adoption of cryptocurrencies is very low so it cannot be expected that fans of KISS would know how to buy and store KISS tokens.
On the other hand, at the moment, there is no standardized global solution that would let you easily hold valuable tokens. It is easy to use a database but from the user’s point of view, it would work somehow like this. If you wanted to buy KISS tokens you would have to send money to the issuer. The price would have to be fixed since there is not even any standardized exchange for these types of tokens. You would need to provide your personal ID to the issuer and she would promise that you will own a few tokens under your ID. Alternatively, if you wanted to avoid providing your ID, you would need to remember the access to a web service. What would you do if you wanted to sell the tokens? The issuer would have to send you back your money. If the issuer wanted to let you freely sell tokens then where would you do it? Should the issuer create some exchange just for that? It is a bit cumbersome.
Using a database is not automatically a better or cheaper solution. Token issuer needs to operate a server with the database and create a web service. Moreover, it must deal with payments and storing personal IDs. Using Cardano can be a faster and easier solution with many benefits. Wallets and decentralized exchanges will be available in the Cardano ecosystem for free. Besides all that, fans will be owners of KISS tokens with all benefits of blockchain and decentralization. If the concept of decentralization becomes a standard, it will be a preferred option.
The adoption of decentralized services will grow. Everybody who will understand the basic principles of Bitcoin will also be able to use tokens. A new generation of Internet users is able to buy things on the internet. Buying tokens for stable coins or cryptocurrencies will be an easy task for them. One day, there will probably be only one wallet for all assets. People just pick assets that they wish to hold and they will be able to easily buy them. At this point, it will be technologically beneficial to have only one wallet for all existing assets than an extra solution for KISS tokens and another solution for other types of tokens. Imagine that Metallica and AC/DC issue tokens for their fans. You will want to have safely stored your ADA coins and stable coins. Maybe some shares and vouchers. It is definitely better to have all assets you own in one wallet.
At the end of the day, it is not about whether a database could be a cheaper or better solution. It is about the possibility to easily issue tokens and allow people to buy, sell or trade them on the global level. All that without the need to provide a personal ID. It is also about standardization and a smooth user experience. One loves rock music, the other sport, or food. Token issuers and users can use the same infrastructure regardless of industry.
What about trust? In the case of KISS coins, you need to believe Gene that he will invite you to the party or let you enter the concert when you prove you hold the expected amount of tokens. When you need to trust one entity then a database can be used. We could argue that a database is a single point of failure. If someone managed to get it out of order before the concert then you would have no chance to prove that you are a proud holder of KISS tokens.
What if holders of tokens need to trust the entity that nothing bad happens with tokens. Data in a database can be manipulated and only the token issuer can benefit from that. In the case of blockchain, all transactions are publicly available and everybody in the world can verify them. Cardano can ensure that the issuer behaves correctly and possible misbehavior can be easily revealed. The issuer cannot issue more tokens or delete some transactions secretly. Additional issuance of tokens can be easily spotted and the issuer will no longer be trusted. It is not possible to delete transactions from the blockchain. Cardano is a kind of trust machine between token issuers and users. It brings additional value to users.
The infrastructure for issuing and using tokens will be ready and the Cardano ecosystem will grow over time. Using it is beneficial for both issuers and users. It improves transparency, enhances liquidity, and is completely decentralized with all benefits that decentralization brings. When more entities will use the same infrastructure then everybody will know that it works fine and you do not need to doubt the quality of decentralization. It can be difficult for institutions to build their own infrastructure and claim that it is a decentralized blockchain network. It can be hard to prove it and verify it. Cardano can become a standard for tokenization. Institutions, people, businessmen, and others can use it but nobody is able to change rules and properties on the infrastructure level. Nobody will be able to change data in the blockchain.
In our example, we have shown you how KISS tokens can be used. Tokens can be everything that comes to your mind and they can be used in real business. Do not take us wrong. Rock music is also serious business. In the banking sector, tokens can represent real assets like fiat currencies, stocks, commodities, or properties.
Tokenization has in general two major problems that must be considered. Technology and legislative. Cardano will offer the technology. In the next few years, it will be more about legislative problems. It is technologically easy to tokenize shares but authorities must prepare a regulatory framework for the tokenization. Once rules are defined the world might begin to change. We already have tokenized USD solutions and some of them are regulated. We believe that it is a matter of time to see the tokenization of other assets.
Tokenization is a great concept that has the potential to digitize financial operations that are nowadays slow, unreliable, and non-transparent. It will be more evident with higher adoption. Once a bigger institution uses Cardano for tokenization others will join over time. Currently, the financial world consists of many scattered systems that are interconnected. Cardano can become a global financial backbone. It is an ambitious goal but it is achievable.
Tokenization makes sense only if transaction fees remain low in the long term. Stable coins are at the moment the best use case of tokenization. People will be probably willing to use tokenized fiat or algorithmic stable coins but only if fees do not prevent usage. In our view, one USD is already a high fee. The current fees in the DeFi space are exorbitant and newcomers are not rushing to join the space. Blockchain networks must be inclusive but high fees make them exclusive. Cardano can remain an inclusive network.