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Unique tokens—a new trend in the world of blockchain

2017 was undoubtedly the year of the ICO—raising funds by distribution of blockchain tokens. Although neither initial coin offerings nor tokens were entirely new, in 2017 they exploded with full force, generating a huge growth in interest in blockchain technology.

The explosion of interest in tokens is also closely tied to the trend of “tokenisation,” i.e. linking tokens to various rights or goods. A classic example is the attempt to represent securities (shares, bonds or derivatives) as tokens—no simple task from a legal perspective. There are also attempts to link tokens to real estate, currencies, goods, commodities, and various types of products and services, intellectual property rights, and other rights.

The ERC20 token standard, defining several fundamental functions of the token, is particularly popular in the Ethereum network. Other standards are also being created with the aim of developing additional functionalities for tokens. Although tokens were known before, it was the ERC20 standard that sparked their incredible popularity.

Sometimes we overlook the fact that each token is only a certain smart contract on a blockchain. As computer programs, smart contracts can appear in numerous varieties. The ERC20 standard enables creation of a defined number of tokens that are fungible (interchangeable), i.e. none of them will differ in any way from the others. In many applications this is a major advantage, as it provides a guarantee that the digital goods we create, symbolised by tokens, will be identical.

But there is no barrier to taking the opposite tack and designing a smart contract enabling creation of unique (non-fungible) tokens, differing along defined parameters. Unique tokens, like fungible tokens, have existed for several years, but there are many indications that the development of the ERC721 standard in the second half of 2017 has facilitated the rapid growth of this conception.

What can unique tokens be used for? Currently they are most often used to create a collection of digital objects, as symbolised by the well-known Cryptokitties. Each Cryptokitty on a blockchain is unique (unrepeatable), and this is guaranteed by the blockchain technology. Thus it is comparable to collectors’ items in the analogue world, such as collectible antique baseball cards.

Cryptokitties and similar projects are for now mostly a game (even though they can involve millions of real dollars), but unique tokens offer much greater potential. In practice they probably constitute the first method for representing unique values in the digital world.

What are unique tokens capable of doing? Undoubtedly they can represent various types of digital goods. It cannot be ruled out, however, that like fungible tokens, unique tokens will find numerous real-world applications. For example, there are currently many projects underway attempting to disrupt the real estate market and facilitate exposure to this market by investors via representation of ownership or other rights to real estate (e.g. timesharing) in the form of tokens. Unique tokens could represent individual units at a real estate development. Another concept would link unique tokens to works of art, whether digital or analogue.

Unique tokens are still an unexplored topic from the legal and tax point of view. Depending on the context they are used in, they may present entirely new legal issues. It is already apparent that unique tokens reveal the ambiguity in the legal notion of a token. They can serve many purposes simultaneously and those purposes can also change over time. From the perspective of a lawyer trying to conduct an accurate and practical legal analysis, they will pose many additional and ambitious challenges.

There is no shortage of ideas for applying unique tokens. Will they approach fungible tokens in their popularity? We will soon know. But we must remember that this is still only another variation on what can be achieved thanks to the technology of blockchain and smart contracts. No doubt some of the upcoming ideas for applying them will surprise us.

Jacek Czarnecki