Over the course of many conversations with potential issuers in recent months, some of the questions we find ourselves answering most frequently are around what types of tokens issuers can use to launch their coin, and on what blockchain they can issue them. The following is an overview of all of the different options that issuers have when launching their token, and the pros and cons of each.
Option 1: Building Your Own Blockchain
The first option is to build your own blockchain on which to launch your token. In the early days of cryptocurrency, this was the only option for issuers – leading to the rise of tokens such as Litecoin, Peercoin, Namecoin, Dogecoin, and Mastercoin, all of which were built on their own blockchain and designed to rival Bitcoin.
Launching your own blockchain carries the highest degree of difficulty in terms of implementation. Issuers have to build the blockchain itself from the ground up, and then find a community of users to support it and participate in the transaction verification process. Key considerations include:
- Consensus Mechanism – What mechanism will your blockchain use to verify and approve transactions? (i.e., mining, proof-of-stake, etc.)
Key Algorithm – What algorithm will the blockchain use to generate the keys used to receive and approve transactions?
- Smart Contracts – Will transactions be UTXO and stack-based, or EVM-based like Ethereum?
While launching your own blockchain may be the most challenging option, it also has many benefits – primarily due to the level of customization it offers. Every existing blockchain has its own unique set of limitations and technical tradeoffs, and there may not be one that adequately suits the needs of your business or project. By building your own blockchain, you can tailor it specifically to meet your needs.
Option 2: Issuing Your Token Using an Open Standard on an Existing Blockchain
With the launch of Ethereum in July of 2015, developers were provided with an attractive alternative to building their own blockchain. The Ethereum blockchain enabled the concept of smart contracts, Using smart contracts, or decentralized computer programs which would enable to transfer of digital assets under certain conditions. With smart contracts, developers could create their own unique digital assets or “tokens” on top of the Ethereum blockchain.
Since then, the community has moved to standardize the smart contracts underlying Ethereum-based applications and tokens to ensure they can seamlessly and predictably interact with each other and infrastructure found in the broader Ethereum ecosystem. The most commonly used open standard, ERC-20, offers a template for creating tokens based on a list of standardized conventions and functions including how the token is transferred between addresses and how data within each token is accessed. Since then, a number of other blockchains have adopted similar open standards for launching tokens, including Stellar.
Launching a token using these open standards is the simplest option, and on Ethereum with ERC-20, the best tested and most stable. It requires the least amount of development time and infrastructure, while keeping considerations more limited in scope:
- Underlying Blockchain – What blockchain do you want to launch on? Common blockchains that enable creation of coins are Ethereum and Stellar.
- Standard – What standard will you use to create the coin? (ERC-20, etc.)
Take note, by launching a token as an open standard on an existing blockchain, you are beholden to the limitations of that blockchain and standard – be it transaction speed, functionality or other related features.
Option 3: Issue a Token Using a Restricted Standard on an Existing Blockchain
This option is similar to the prior open standard option, and carries a low infrastructure cost since it involves building on top of other blockchains. Unlike an open standard, however, launching a token using a restricted standard allows you to issue a token that complies with certain securities or other regulations across the world – also known as a “security token.” These standards include much of the same functionality as open standards like ERC-20, but also allow issuers to control when their tokens can be transferred, how many tokens can be transferred, and under what conditions. The following considerations apply:
Underlying Blockchain – What blockchain will this token be implemented on? Permissioned tokens are possible on blockchains like Ethereum and Stellar.
Standard – What standard will be used to create the coin? Our engineers at TokenSoft recently open sourced the “Simple Restricted Token Standard”, which is an easy way you to enforce certain transfer restrictions. More information on The Simple Restricted Token Standard can be found here.
Infrastructure – Which exchanges will support a restricted standard? These standards are new and require the proper regulatory framework, both of which are still nascent.
It is important to note that using a restricted standard requires ongoing maintenance to ensure compliance with the latest regulations. It is typically recommended that issuers monitor for changes in regulations and manage their token accordingly.
Which Option is Right for Me?
Every issuer carries a different product roadmap with varied requirements and constraints. More ambitious teams carrying strong technology requirements may want to create their own blockchain. Those that want to focus more on their product and less on their token may seek to launch on an open standard. Which token launching approach is right for you is entirely dependent on the specific needs of your business or project.