Tokens Should Serve Blockchains, Not the Other Way Around

The oversimplification of token design creates major problems for today’s blockchains

Tokens are often treated as inevitable pieces of blockchains and decentralization, mostly argued to be the only solution for designing a Sybil-resistant public network. Though this explanation is for sure very compelling, does it really represent the full picture?

In reality, blockchains need many different types of tokens, and unfortunately today’s systems mostly optimize for only one or two potential use cases of them.

In this article, we will look into various types of tokens that blockchains use, inspect their differences, and discuss how these concepts are mishandled in today’s blockchains.

What was the original token?

The first one, Bitcoin, was a financial token before anything. It was clearly proposed as a replacement to “money”, and it was aiming to become the next digital currency. Although Bitcoin is still in the process of adoption today, it actually achieves very well what we expect from a financial token in the technical sense.

First of all, we need a financial token to be public and accessible, so that it can be accepted as payment in most of the world. We ask it to have an inflation rate that is deterministic and bounded, meaning that the amount of tokens that we have will not decrease in ratio overnight in an amount that we cannot know beforehand.

Bitcoin is clearly holding all of these merits, and thus technically, it constitutes a technically effective alternative to conventional monetary assets. Thus, we can say Bitcoin was very successful as a design in terms of a financial token.

This success was the reason that almost all successors of Bitcoin used the exact same design for very different goals, which is the topic of this article.

The first mistake: Gas Token

Firstly, the need for a gas token emerged.

Since each TX on a blockchain consumes some real energy and funds, we need a way to make sure no one uses the network excessively, or at least pays for doing so. In other terms, the gas token creates a mechanism to “rate limit” users and prevent spamming.

Naturally, the existing financial token of the system, e.g. BTC in Bitcoin or ETH in Ethereum, was a very suitable choice for this need. Without any modifications, some amount of this native financial token of the network was required to be paid with every TX, which was then either distributed to miners / validators or burned.

This design was not only convenient, but also seemed as a very clever idea: By constantly forcing the system to burn some amount of token in every TX, an upward pressure over the token price is created. Basically, this design resulted in a direct relation between the total usage of the network and the price of the underlying token. However, the reality is not this simple.

Why should we not use BTC or ETH for gas?

Firstly, the gas token actually has a very different structure than a financial token. It is also asked to be available, but it does not need to be “tradable”. A financial token makes sense only if it is exchanged in various financial systems, but this is not true for the gas token. Ideally, we want the gas token’s price to be fixed, or very slowly changing, so that the amount of computation power that we can buy today does not change tomorrow. Of course, based on the demand a network can become more expensive, but this should only require more gas tokens to be paid by users.

In contrast, the financial token needs to be very adaptive to external factors. If a major political figure makes a statement about blockchain, we expect the price of ETH to change immediately, but why does the amount of computation we can do also get affected?

Maybe this problem seems like a small one, but it actually creates one of the biggest barriers while designing everyday software on top of blockchain. The volatile price of the gas token forces developers to actually think and optimize for their token purchases’ time and place, which should definitely not be the job of a backend engineer!

A natural solution is of course using a stable token, like USDC, to pay for the gas fees, which seems like satisfying the technical requirements at first sight. However, even though USDC solves the UX problem, it weakens the decentralization and neutrality of the network if access to blockspace depends on a centralized asset.

Simply, the main idea is that using the same token both as a “money” or financial instrument, and also as a rate-limiting device is a problem in its essence. Networks should optimize themselves to have a different type of a rate limiter. As it is far from this article’s subject, we do not detail some solutions here, but readers interested can read more about gasless blockchains or novel rate-limiting systems in public networks.

And this was just the “smaller” problem…

Unfortunately, gas tokens are not the biggest problem of blockchains today. A more urgent matter is the very security of the consensus, which is assumed to be provided through an economic security token.

An economic security token is the token that is used to stake & slash in Proof of Stake type consensus models, which is, excluding Bitcoin and a few others, the most commonly used consensus design in today’s systems. Of course, almost all PoS blockchains use their financial & gas token also as their economic security token…

The technical differences between the economic security token and financial token are not as easy to describe as before. Since, by its name, we also expect both to have some economic value attached, they seem to be covering similar topics. However, there is a big difference between a regular financial asset and a security mechanism.

While dealing with finances, economics is the only thing that matters. For a purely financial asset, volatility is mainly a market risk. For a consensus-security asset, volatility becomes a security problem.

If you allow the security of a network to change as freely as an open market, this creates a huge risk over the consensus. More precisely, if the asset used for staking is also freely traded, attackers may be able to hedge or partially offset slashing risk through external markets.

Of course, in reality things are slightly more complex, so we did not see any consensus attack on ETH so far. However, the core problem that the entire security of a network depends fully on volatile tokens remains intact.

No secure network in the world should lose half of its security overnight because a celebrity sent a tweet.

Then, what?

So should we conclude that blockchain is on thin ice, and there is nothing to be done now to save us?

Luckily, no. Starting with social consensus, there are a lot of mechanisms that secure blockchains with more complex techniques. However, this does not mean that we should not aim for the better.

Future network designs should find better ways to solve these many problems that we have about tokens. In this article, we have named only three types of significant tokens, but this is a long list, and using a single design for all, is for sure not the best choice possible.

We should design tokens around what blockchains actually need, instead of designing blockchains around the tokens we want to sell.