Defi

What is a Digital Token‪?

Feb 23, 2021

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HOST:  Hey everybody, welcome back to the Unstoppable Podcast.  I’m Diana Chen, your host and I’m here today with my co-host, Matthew Gould, co-founder and CEO of Unstoppable Domains.  Hey Matt, how’s it going?

MATTHEW GOULD:  I’m doing just fine.

HOST:  Great.  So in a previous episode we tackled the coins versus tokens question and we got a little over ambitious there, trying to tackle both sides of it only got through coins, so wanted to do another episode, covering more in detail what tokens are.  So if you haven’t yet listened to that coins vs tokens episode, please go back and do that right now.  So that you have some context for what we’re talking about.  But Matt, to start off, why don’t you just give us a super quick 60 seconds recap of what tokens are and then we’ll dive into more of the details. 

MATTHEW GOULD:  Tokens are—they can be any type of asset you can think of that are represented on a blockchain.  And a good way to think about this is collectibles, which we’ve talked a lot about in the past, but they’re things that you maybe wouldn’t initially think about as having some sort of digital representation.  So a good–a good example, is art that you can represent as a token on the blockchain and all that does is show who owns it.  So it’s almost like a certificate of like, I’m the owner of this.

And another one would be something like baseball cards or basketball cards.  We’ve talked about a few companies that are actually already doing this with NBA top shots as an example for a token that represents a player card for basketball.  So collectibles is a good way to get your mind around what, what can people do with, with these tokens.  And I think that like there’s some other types of tokens as well, but really, we’re going to focus on the collectibles batch of tokens, at least for this discussion.

HOST:  Okay.  Cool.  So one of the biggest things that I have—I’ve been seen on Twitter and reading articles about and everything is NFTs and we had Devin Finzer from OpenSea on a previous episode talking about NFTs non-fungible tokens.  And so I want to dive deeper into that and talk about exactly what NFTs are.  So maybe to start off, why don’t you tell us what’s the difference between a fungible token and a non-fungible token NFT?

MATTHEW GOULD:  There are two broad classes of tokens and one was the collectibles which I mentioned just a minute ago.  There is also a whole subset of what are known as fungible tokens and that just means they’re like units of account.  So what does that mean?  Like if you have one share of stock of Microsoft, or 100 shares of stock on Microsoft, all of those shares are exactly the same, just the number of them that are different.

So let’s talk about these fungible tokens first, so yeah, like security tokens, like shares of Microsoft I talked about.  You could also have a debt instrument like you owe someone some money, so there could be a token that represents that loan.  And you could have—you could have a transactional token.  And so maybe this is like a token on the blockchain for an API credit for like Amazon, using an Amazon server or something like that.  These might also be classified as utility tokens.

Maybe you have a token on a crypto network that gives, you know, the right to verify a piece of information.  That would be something like chain link for instance or you could have a governance token, which is a, a way for you to vote.  And the thing about these fungible tokens is they’re all, you can stack them on top of each other.  So you could have like, you could have one share of Microsoft or you could have a 100 shares of, of Microsoft.  You could have one credit for a storage network on, you know, Amazon or a 100 credits for a storage network and the storage network can be like, you know, like IPFS or one of these decentralized storage networks as well.

Then you could have a governance token and you could have one of those and so you’d have one vote or you could have a 1000 of those and you would have 1000 votes.  So all of these tokens are in the fungible token basket and the difference between these fungible tokens and non-fungible tokens is that you can—they’re countable, so you have a bunch of them.

A great example of something that is a non-fungible token is like a piece of real estate.  So anyone who’s bought a piece of real estate before will tell you, my house is unique, right?  And it’s like the only house that’s like my house. And that’s what real estate agents tell you all the time like, location, location, location.  There can only be one person at that one spot at one time.  And that’s what makes non-fungible tokens a unique class from fungible tokens.

And in the non-fungible space again, I think about collector’s items like baseball cards or something.  And then when you’re thinking in the fungible item token space, I would think something like stock certificates if I was to shortcut it and give you an easy thing to hang your head on.

HOST:  Got it.  So if we’re thinking in terms of finance, which we oftentimes do as we talk about cryptocurrency, a fungible token would be something like, if I gave you—if I give a dollar and you give me four quarters back, that’s the same thing it doesn’t really matter.  You don’t have to give me that same exact dollar that I gave you back to me.  But if I—in, in the case of non-fungible tokens, if I give you a dollar, you have to give me that exact same dollar bill back or else it’s not the same thing.

MATTHEW GOULD:  I like your first example there, like if I give you—for fungible token, if I give you a dollar and you give me four quarters back like I’m fine ‘cause it’s exactly the same thing.  For non-fungible token, if I give you a Mona Lisa, and then you give me back a Michael Jordan card, that’s not the same, right?  And like, oh, they’re both cards, I’m like well, no, probably the Mona Lisa is the one that I want to have back if that’s what I gave it to you.  Yeah, So that—I think that’s a good way of doing that comparison.

HOST:  Got it.  So in terms of the purpose that fungible tokens and non-fungible tokens serve, can you talk about each of them and how they differ?

MATTHEW GOULD:  It’s really about uniqueness of, of the items and so when you have a situation where you really want the underlying token to be 100% equal to each other and currencies are, obviously the most obvious one, like, like in your example, if I give you a dollar, you know, it’s good if you can give me back four quarters instead of having to give me back exactly that dollar because that would make it much more complicated for trading.  Other places where fungible tokens make sense, in this case are for service credits like for storage, like if you want to have storage on the—on a—on a IPFS network like a decentralized storage network where you want to have storage on something maybe more traditional like Amazon, those API credits you want them to be easily switched out.

So, you know, if I spend—if I have, you know, 10,000 Amazon credits and I spend 5555, you know, you can—you can subtract out and then I’ll just have my balance remaining on there.  So that’s when you’re going to want to have a fungible token, is when you really care about to be easy to exchange.

When do you want non-fungible token?  A non-fungible token works really well, if you have a collection of unique items, and then it can actually get much more complex because you could have unique items that have some things in common.  And, and again, baseball cards are a great way to think about this.  You could have a rookie card for Michael Jordan, right, for instance, and there may be like 50 of those rookie cards total in existence, but they—but there’s only 50 total and they are uniquely different from a rookie card for like Bo Jackson.

So, so that’s—so collections are just, I like to think about them as a much more complex fungible tokens, right.  So you could have—you could have a collection of items and that’s like the superset and maybe there’s a subset of those items that are fungible, but it doesn’t work the other way around.  So the, the non-fungible token space is much, much broader in the things that you can classify.

And if you think about your everyday life, you know, the house that you live in, is not the same as your neighbor’s house like no one else can have that exact piece of property. So that would be a non-fungible token.  And then your identity that you have like for your driver’s license like that should be unique, hopefully.  And that would be an example of something that you could represent as a non-fungible token.

And when—what we’re doing when we say token, is we’re just taking something that we have in a non-digital format and then turn it into a digital format for tracking that thing.  So when you—when you hear fungible token or non-fungible token, you can just think in your head, okay, and the token part means that I’ve just made a digital representation of that thing, so that it’s easier to track in our computerized world.  And the first part of that, whether it’s fungible or not, is just a description of how complex the amount of data is, that’s associated with that particular item.

And again, like Michael Jordan, original rookie card is much more unique and has a lot more information about it than a single share of a company that’s just like any other share of company.

HOST:  Now, can you talk about some, some of the reasons why NFTs have gotten so much hype recently, it seems like everybody’s talking about it whether positive or negative.  Is it just because it’s a newer class than fungible tokens or because it’s, it has a broader applicability than fungible tokens or what else is important for people to know about NFTs right now?

MATTHEW GOULD:  Well, I would say one thing that’s different about NFTs, is, is they traditionally sit in spaces that have less regulation.  Just to be straightforward about it.

So most of our fungible tokens, like the currency that we use or the stock certificates are highly regulated.  Whereas for the non-fungible token space to collectibles—the collector’s items, there’s a lot less rules around engagement.  And this is because inside the, you know, the collections market, each one of those markets itself is kind of unique and small.  And again, it’s because, a baseball card is different than a basketball card is different from, you know, a pottery collection.  So these things are very different from each other and your house is different from your neighbor’s house and a house in California is different than a house in Texas, you know, ‘cause they don’t have earthquakes.

So there’s, there’s all these—so these markets are a lot smaller and maybe easier to tackle from a—from just a regulatory and then also like a building process.  Now, when I say easy to tackle, I mean, it’s easy to see all the potential consequences of building a new ecosystem around a particular collectible.  Like if you’re selling basketball cards online, you know, you have a pretty good idea of your market and you don’t have to worry about it potentially causing problems for other people’s markets.

Very different if you create a cryptocurrency like a USD Token on the blockchain, because now, for the US dollar tokens, for instance, there’s $40 billion of those already.  And the $40 billion is, you know, that’s a lot of money and that happened within two years, so that’s really, really fast.  And having $40 billion of digital currency out there that can make loans or, you know, start businesses or trade can impact markets in a way that’s much more substantial.

So I think that a lot of the reasons why NFTs are interesting right now, is the markets are easier to understand and they’re easier to tackle and they’re also good businesses, and they’re also a lot more of them.  So you, you—there’s—I think there’s a lot of new—a lot more ways to innovate around NFTs whereas finance is kind of a winner take all market with a lot of regulation.

HOST:  Got it.  And so you, you mentioned earlier MBA top shots as one of the new ones of, you know, basically trading virtual basketball cards.  And then there’s also CryptoKitties for instance, we’ve talked about on a previous episode where you can see actual application of NFTs.  Can you name some other examples, some big examples that are out there right now of how people can actually use NFTs?  And then can you also imagine some other uses for NFTs that maybe haven’t become realized yet as of February 2021, but that we could see happening in the future?

MATTHEW GOULD:  I’m not going to name drop just a bunch of projects, but I would suggest going around and looking and there’s a lot of different places to look at all the different NFT projects that exist.  There’s a lot of artists that are directly creating these themselves and as we learned in our conversation with Devin, you can actually create your own NFT right now, if you would like to just try to get some engagement and, and figure out how these things—how these things work.

Then if I’m thinking about what’s something that NFTs could do that would be really impactful for everybody.  I actually kind of like how this can potentially help with credentials.  And so, there’s, you know, there’s a couple of them to think about, like, tickets for concert, right might be—might be interesting.  Or you could also think about something like licenses for various different things that could be really helpful to have those digital.

So gun license for instance, if you’re travelling between states and the states have different laws may be really nice if it’s easier for you to carry around some way to prove that you are properly licensed, you know, for hunting or what have you, as you—as you move around for different states because you have that in your trunk.  And those databases are not perfect right now.  So it’d be nice to have something like that on a blockchain and then you would want to track it uniquely, something like that.  So that people could make sure that you’re being safe.

So I think that things like that are potentially interesting. And so yeah, anything around licensing I think is probably a good long term thing to explore on NFTs.  Credentials are also another one.  I would say college degrees, right, like so you always hear about these people pretending that they have a college degree that they don’t really have and that would be something it would be really easy educational attainment to put as a some sort of token that’s represented on the blockchain.  And that would be unique to you ‘cause it would you know, have your name on it that says like, oh, yeah, you do have an MBA or you did attend these four or five courses.

And you can see this now with like, Coursera and a few of these technical training courses online, that people are posting their LinkedIn that are verified.  So, they’re starting to do that, but it’s not super portable between the different platforms.  So credentials, I think are—credentials and licenses, I think are two areas that are longer term very interesting for NFTs.

And then in the short term, I really like all the arts and all the—all the artwork and the different like little games that you’re seeing that are popping up with NFTs.  And again, those are like very safe areas for companies, businesses and people, in my opinion to interact and play with because, you know, what you’re dealing with.  You know, the downside is pretty limited.  You can even make them yourself for free and get just get a feel for how these types of things might work.

HOST:  Yeah, and I’m, I’m wondering in the long run, do you see a situation where even smaller things like objects that you own can be represented by NFTs?  I’m just thinking about a situation where say, your bike gets stolen, right, and then you go on Craigslist and you see somebody else selling your bike.  So if you had an NFT attached to your bike, then somebody else couldn’t sell that on Craigslist, right?

MATTHEW GOULD:  Yeah, so I’ve actually thought about this too.  And I actually—I think it’d be neat if basically everything you bought, like your receipts, you’re able to collate into like one place.  Now, getting all that information on a blockchain right now, is prohibitive, just because blockchains aren’t fast enough yet.  And, you know, we are at the dial up phase of blockchain, so, we have like some time to get there, but there’s a lot of cool information you could have there.

So one of the things that I have to do frequently is borrow something from one of my neighbors.  So, I’m doing some sort of housework and I’m like, oh, I need an X tool and so one of the thoughts that I just had was like, man, wouldn’t it be cool if my neighbors, you know, they—everything that they’re—all their household things that they’re interacting with -- if they had a catalogue of that from their receipts, just as you’re checking out or purchasing or whatever.  I could actually just ping my social network and be like, hey, does anybody have, you know, this kind of rancho or maybe this is all or like, I would—I could really use a riding lawnmower today or something like that.  And then I would be inside my own social network, be able to bubble up that information. And oh yeah, for sure, you can come on borrow it from me.

And that’s all sorts of things that are happening like this already for communities to like, there’s a lot of networks of like Neighborhood Associations or whatever that people could share.  And this would just kind of make that a lot easier to do.

So yeah, I think all your items should have something, you know, anything that you have, that’s over like 50 bucks like why not have a place, have some sort of digital representation of it, so that you can run software against it.  And the example I just gave you was enabling your social network to search.  So, so and that’s like, it seems—it’s not something that you would, would be thinking about today that you would want to do, but I do think it’s something that people in the future are going to like, oh, yeah, of course, I can easily search through all the items that I own to find something.

HOST:  Is that something that you see realistically happening in the future beyond just being a crazy idea?  I mean, it’s, it’s hard to say now, right, because it’s like, if we go back to dial up times, could you really envision something like Uber at that time?  Probably not, probably sounded way crazier than what you just said sounds to us today.

MATTHEW GOULD:  I actually think it’s not that crazy because they already track all the items in warehouses, at like Amazon, right.  And so they always say that the future is already here, it’s just not evenly distributed.  And if you go into like an Amazon warehouse or one of these big retailers, they have you know, little NFT tags on all 10 million items in there and they can just run a huge scanner over the top of the roof and they, they know where everything is in the entire warehouse and they have like an inventory accounting.  And for them, that’s great ‘cause it just saves them ton of money on tracking inventory.

Now you don’t think about in your personal life, but there’s probably all sorts of things that you have more than one of or that you’ve lost or something like that.  It would be nice if you could have a better sense of what that inventory was and what your usage was for personal life optimization.  And, and, but yeah, so I think—I think it is—it’s a natural thing that will happen.  And again, that’s another area that’s just search and you just see how big search is on, you know, Google’s giant company for building search and people are getting more and more personalized search tools.

You know, AI assistants are a very good example of that on your cell phone where you can ask Siri for something and that’s just a search instrument as well.  So I think, yeah, I think it’s more realistic than people maybe imagining right now.

HOST:  Yeah, I got you.  So for somebody that is new to this space hearing about NFTs for the first time and this got them curious, and they want to go check it out for themselves, what’s the best way for them to go and buy an NFT?  And then what can they actually do with it?  Like is it really just a digital token that they’re eyeing on to for who knows how long or say I go and buy an NFT that’s attached to a piece of art that I really like, I can actually receive a physical painting with the NFT that I own to hang up on my wall and, you know, see something more tangible?

MATTHEW GOULD:  Right.  We had a great conversation with Devin from OpenSea about this and one of the things that I didn’t know is, they actually have a place for you to create your own NFTs right now, just within their interface on OpenSea.  So I think that’s great like if you want to just play around, go and make your own.  And then he was also suggesting a lot of artists, from musicians to, you know, actual graffiti artists right for as another example are going ahead and making their own NFTs, which have real value for your typical everyday user right now who’s not interested in creating.  I know there’s a lot of creators out there, but for everyone who’s just maybe kind of sitting on the sidelines and checking things out.  It is still super early in this market and there is not a lot of utility for these items yet.  We’re talking about where would I display my piece of digital artwork and right now you don’t really have a lot of places to display it or to use it.

And then you’re asking like, “How can I buy something and then redeem it?” We had a conversation around a company that had NFTs for wine and you could redeem it but that was a little bit clunky.  Like you can buy an—you could buy a bottle of wine and then you could submit it to their website and then they would mail you the bottle of wine.  But that is—that is today, right?  And if we fast forward several years from now, you’re going to have a lot more options for real world items that you could potentially redeem.  And then you’ll probably have a lot more places to display or interact using your NFT than you have right now.

So it’s super early I would suggest is we’re still in the playground phase.  It’s great if you’re a creator because you can be—you can jump right to the front of the line and get on there early.  And then for others, I think it’s a great time to just go learn and kind of watch what’s happening and follow your passion.  Like if you’re really passionate about this segment or this other segment.

The cool part about NFTs is, it covers a lot of ground.  So like you can—anything from real estate to art to shoes to anything you can imagine that is a group of items where they’re kind, you know, of different from each other, and maybe something that you would want to put into a collection.

HOST:  Awesome, yeah, I, I definitely do think that with a lot of the things we talked about on this podcast, the best way to learn more is just to go and try it out yourself, play around with it, see what you can do with it, explore it more yourself, that’s the best way to learn.

Next, kind of shifting gears a little bit here.  One thing I want to call out is something that I’ve seen in the news a lot and something that we’re all familiar with.  Facebook has said, they’ve been saying since back in 2019 that they’re going to launch a digital currency called DM, on their Libra blockchain this year.  So can you talk more about what that all means?  Why is Facebook doing this and what does that mean for actual users?

MATTHEW GOULD:  Well, I think it would be great if we had more companies experimenting with digital currencies and it’s good to see a large company like Facebook pushing into this space.  After our conversation with, with various people that we’ve talked with the space, I actually think there’s a lot more for them to work out on the regulatory side than you would imagine.  So one of the big ones that got brought up recently for us— for me that I hadn’t thought deeply enough, was in our recent conversation about privacy that we had on the show.  If you create a Facebook DM token and you’re using the Facebook wallet and you’re making all your payments with this, how much information is Facebook collecting about you, the user?

So I will say that, like six plus months ago, I was super excited about Facebook having a cryptocurrency ‘cause I think to myself, wow, just think there’s going to be like 2 billion more people who know how to interact with cryptocurrency.  And so that’s huge, is a huge market education.  It’s good for everybody to get more into crypto.

On the flip side of that though, there are a lot of privacy concerns around using a Facebook cryptocurrency that I think should be explored much more deeply.  So this is actually one area where I would like to see more government released commenting on what—on what this could mean for the industry and I’m usually, you know, less regulation is usually better for new emerging industries.

But this goes back to something I said earlier when you’re doing—when you’re building a like currency token which Facebook is essentially doing here that’s going to potentially interact with financial markets.  It could get really big really fast you could have you know $500 billion on Facebook currency inside of a year or two.  And that could impact financial markets, investing, fraud, financing, all sorts of things.  You just extremely rapidly.

So of all the places where I’m very excited about the crypto industry to just grow super-fast, I would say in the case of the DM token for a big company like Facebook, I hope they take it a little bit slower.  And it would be great if regulators could sit down and talk to them about it ‘cause they’re already going to have issues in the EU over GDPR, what things that they’re allowed to track on users for their spending habits.  You know, what you spend your money on is very important and close to who you are.  And if, if you can give me everyone’s spending habits and everything they spend money on, I could tell you quite a lot about that person in a way that may be not great for democracy.

And so we need to—we definitely need to do a little bit more digging on Facebook currency.  So I’m going to be watching those announcements and I’m hoping to see more regulators both here in the US and then in the EU and then also globally, kind of dig in a little bit more and see how that’s going to do.  We have a lot of regulation around currency for banks for a reason, so I don’t see why Facebook should escape those regulations just because they claim to be, you know, separate from that somehow.

HOST:  Yeah, and this might be a different topic for a different day, but to me, my understanding is cryptocurrency, the whole point of that is privacy, autonomy, decentralization.  And so having a big company that’s very centralized, like Facebook, coming out with a cryptocurrency it almost feels a little paradoxical, like help me wrap my mind around that?

MATTHEW GOULD:  I think it is, definitely against the ethos for crypto people and I also think it’s against the ethos for just how our banking system works currently.  There are all sorts of laws now around banks of what information they can share about your spending habits with other people and that’s for a reason.  Like if you’re—if you’re one of the large US banks, you can’t resell your customers information about what they spent their money on.  That’s actually not allowed in.  I think you have to get explicit customer permission and you have to do it soon and honestly.  I actually don’t know all the banking laws, so we’d love to talk to somebody in the banking industry.  Please, submit yourself we’d love to have you on the podcast to talk about that specifically, with regards to currency tokens, like the Facebook token that’s coming out.

So yeah, I, I think that it’s not only against crypto ethos, it’s not just crypto people who are concerned about privacy invasion from Facebook coin.  I also think it’s just regular banking, infrastructure is that we already have these rules for our normal banking infrastructure, so why are we going to invent this new third way to do finance that has even less consumer protection?  And I think that that’s potentially, potentially dangerous if it’s not handled correctly.

Now on the other hand, like I fully encourage large companies like Facebook to innovate in the blockchain space, I think it’s super important.  It’s good to have them in the room.  It’s good to have them working to push things forward.  They just please also follow the rules that we already have for regular banking.  I don’t think you should exempt yourself from the privacy laws because this is a new technology field when you’re potentially—’cause you could hurt people.  And I think that they’re—I think they’re very aware of that, that’s also why they slowed down the release.  Like they originally wanted to come out earlier than they are now.  They also had a lot of design changes to how they’re running that.  So I think Facebook is going to be careful and if they’re not, I also fully expect US regulators and EU regulators to start asking a lot more questions because we should.

HOST:  For sure, all right.  Matt, any final thoughts on where digital tokens and NFTs are going to be in 10 years before we wrap up?

MATTHEW GOULD:  It’s hard to predict because it’s a superfast growing space.  I do think it’s interesting.  This is one where I encourage people to go in and go a little bit deeper.  So, you know, in my social network, everyone’s always reaching out to me to ask crypto questions.  And this is one where I feel good directing people because it’s safe, just go play around with some fun collectibles.  Click around on these NFTs, make your own and then kind of get used to handling cryptocurrency with your own wallet, right?  So like if you—you’re not going to be too upset if you lose a drawing that you made, right, for free.

So I think it’s like a—it’s like a good way to enter into the crypto market with, with a low risk and then still get you, you’ll use all the technology that everyone’s using for, you know, trading all these cryptocurrencies everywhere ‘cause it’s the same back end.  So yeah, I think—I think it’s a low risk way to get started and I encourage everyone to go in and play around.

HOST:  Awesome.  Well, thanks so much, Matt, on breaking down tokens for us I hope you always learned a lot from this episode.  Thank you for tuning in and we’ll be back again soon with another episode of The Unstoppable podcast. 

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