It all started in the ether. Ethereum was launched in July 2015. Bitcoin had been around for six years, but the entire cryptocurrency world was still niche.
Bitcoin was designed (and remains to this day) purely as a digital currency. When Ethereum appeared, it had an ace up its sleeve: smart contracts, straight out of the box. This means that third-party developers can build their own applications and run them in a decentralized way on top of the blockchain Ethereum. Ethereum has surpassed Bitcoin with better marketability and more versatility.
Smart contracts have enabled the creation of user-defined tokens on the Ethereum blockchain. Ethereum Fungible Tokens can be developed with the ERC-20 standard, while unique and non-fungible tokens have been created under the ERC-721 framework. However, user-defined Ethereum tokens (fungible and non-fungible) carried an inherent inefficiency: they required the creation and implementation of custom code because the Ethereum chain did not support native token.
In this article, we will discuss:
Tokenization coming soon
Let's remember the purpose and value of the tokens. Tokenization can be defined as the process of replacing a confidential data element with a non-confidential equivalent. This non-sensitive equivalent is known as a token and has no extrinsic or exploitable meaning or value. Simply put, tokenization is the process of turning things into digital assets.
This approach offers distinct advantages: reduced transaction costs, transparency, greater liquidity, decentralization and greater efficiency, to name a few. In itself, tokenization is a highly versatile resource that paves the way for achieving many business goals. This utility stems from the fact that tokens are programmable, so they can be unique.
For example, tokens can be programmed to give the holder access to exclusive content, personalized merchandise or even a share in the vote. The actual purpose of the voting process is irrelevant. Ultimately, tokenizing the ability to vote gives participants the feeling that they are part of something bigger than themselves and can have their views represented in it.
Tokenization can be used to create financial products and economic models. Examples can be considered in fields as diverse as collectibles, alternative investments, gift cards, sports betting, in-game assets, commodities and more. This has the potential to connect real-world goods, services and activities to the digital space.
Turning things into digital assets, in the Cardano way
Goguen introduces a mechanism by which tokenization is handled natively. That is, the logic is based on the Cardano ledger, rather than smart contracts. By taking this approach, we can implement an efficient tokenization strategy that is superior to the ERC-20 and ERC-721 standards supported by the Ethereum blockchain.
The user-defined tokens on the Ethereum chain (both Fungible ERC-20 and Non-Fungible ERC-721 Tokens) are non-native, i.e. the underlying ledger does not directly support these tokens. This is because tokens created with the ERC-20 and ERC-721 standards are fundamentally different from Ether, Ethereum's native cryptocurrency.
The Cardano approach to tokenization allows for the representation of personalized assets on the blockchain without the need for smart contracts and also allows these assets to behave similarly to the main currency, ada, except that:
. Native tokens can be created and destroyed, unlike ada.
. Ada is the only currency that can be used for service fees, rewards and deposits.
Native tokens, some terminology
The terms 'currency' and 'token' are often used in the cryptographic world. Sometimes these terms are interchangeable, sometimes not. And sometimes, 'token' is a kind of comprehensive term that covers all digital assets.
It is worth highlighting here. Cardano's approach to tokenization is as unique as the ledger itself, so here are some terminology to help you understand the structure of native tokens.
In Goguen / Cardano:
. A token is defined as the representation of an asset stored on the Cardano blockchain
. An asset is anything that can be quantified
. A token pack is a representation of several tokens
. Native refers to the token logic running on the Cardano ratio, rather than using smart contracts.
Native tokens in Cardano
Ethereum requires custom code for user-defined tokens to be supported in the chain; this adds a layer of complexity, cost (gas is required to pay for code execution) and inefficiency, since the token code for both standards is replicated and adapted, rather than being part of the system itself. This is an inherent weakness of the Ethereum chain, as it leaves room for human error. Custom code, if done carelessly, can introduce bugs that can lead to huge financial losses. In one particularly infamous incident, software bugs led to the loss of ether worth $300 million. The Cardano approach aims to prevent such catastrophic errors.
Cardano supports user-defined tokens natively, that is, without the need for custom code, through the native token framework. Native Tokens is an accounting system defined as part of the cryptocurrency book and allows tokens to be traded (tracked, sent and received). This eliminates the need to use custom code or expensive smart contracts. In short, native tokens remove the unnecessary layer of costly complexity and inherent inefficiency found in the Ethereum chain.
Why are native assets needed in Cardano?
Cardano is a distributed ledger. Typically, when a distributed ledger is designed, it can track only a single type of asset (its own cryptocurrency, for example). But as the reason evolves in terms of further decentralization, the need and ability to track multiple asset types using the same infrastructure becomes apparent, which is why many blockchains can support multiple assets such as stablecoins , utility tokens, credential tokens, and security tokens.
Native token functionality extends the accounting infrastructure defined in the ledger model (which is designed to process only ada transactions) to accommodate transactions that use different types of assets simultaneously. The native tokens in Cardano have advantages over the ERC-20 and ERC-721 tokens, in terms of security and accessibility.