Tokens, Cryptocurrencies, and Stablecoins

1. Orienting the Topic: What Are Cryptoassets?

In earlier modules, you saw how blockchains store data and how consensus mechanisms (like Proof of Work and Proof of Stake) keep the ledger synchronized.

Now we focus on what actually moves on these ledgers: cryptoassets.

At a high level:

• Cryptoasset (or token) is a broad term for any digital asset recorded on a blockchain and controlled by cryptographic keys.
• These assets can represent money-like value, access rights, governance power, or claims on collateral.

In this module we will:

1. Distinguish native cryptocurrencies (e.g., BTC, ETH) from tokens built on top of blockchains.
2. Differentiate utility tokens, governance tokens, and other categories.
3. Understand stablecoins and their main collateral models.
4. See how token supply and issuance rules affect incentives, value, and risk.

> Regulatory note (as of early 2026):

> - In the EU, cryptoasset markets are now mainly governed by the MiCA Regulation (Markets in Crypto-Assets), which began applying in stages from 2024, replacing many fragmented national approaches.

> - Globally, classification and regulation of tokens still vary by jurisdiction (e.g., some tokens may be treated as securities, others as payment instruments or commodities). We focus here on economic design, not legal classification, but keep in mind that law can treat similar tokens differently in different countries.

2. Native Cryptocurrencies vs Tokens

First, separate native cryptocurrencies from tokens built on top of a base chain.

Native cryptocurrencies

These are integral to a blockchain’s base protocol:

• Bitcoin (BTC) on the Bitcoin network
• Ether (ETH) on Ethereum
• SOL on Solana, ADA on Cardano, AVAX on Avalanche, etc.

Characteristics:

• Used to pay transaction fees ("gas" on Ethereum).
• Often used as block rewards or staking rewards in consensus.
• Typically the primary asset for value transfer on that chain.

You can visualize a native cryptocurrency as the fuel and currency of the underlying network itself.

Tokens (on top of a base chain)

Tokens are issued via smart contracts on an existing blockchain:

• On Ethereum, many tokens follow the ERC‑20 standard.
• On Solana, tokens follow the SPL standard.

Examples:

• USDC, DAI (stablecoins on Ethereum and other chains)
• UNI (Uniswap governance token)
• LINK (Chainlink token)

Tokens depend on the security and consensus of the underlying chain. They are not mined as part of block creation; instead, they are minted/burned by the token’s smart contract logic.

3. Visual Example: Layers of Assets

Imagine a 3-layer diagram:

1. Bottom layer – Blockchain network

• Example: Ethereum
• Provides: consensus, blocks, security, base protocol rules.

1. Middle layer – Native cryptocurrency

• Example: ETH
• Functions: gas for transactions, staking asset, main store of value on the chain.

1. Top layer – Tokens (smart contracts)

• Examples: USDC, DAI, UNI, various game tokens.
• Each token is just an entry in a smart contract’s internal ledger, which itself is stored on the blockchain.

Concrete scenario:

• You pay gas in ETH to send DAI from your wallet to a friend.
• The Ethereum network charges you in its native coin (ETH), but the value you transfer is a token (DAI) defined by a smart contract.

This layering is crucial: tokens cannot exist without a host blockchain and its native cryptocurrency, because they rely on that chain’s consensus and fee mechanism.

4. Utility Tokens vs Governance Tokens

Within tokens, two very common economic roles are utility and governance.

Utility tokens

A utility token is designed to provide access to a product, service, or functionality.

Typical roles:

• Pay for usage (e.g., transaction fees on a dApp, storage, bandwidth).
• Incentivize behavior (e.g., rewards for providing liquidity or data).
• Sometimes used in in‑app economies (games, marketplaces).

Examples:

• LINK: used to pay Chainlink oracles for data services.
• Many game tokens: used to buy in-game items or upgrades.

Key point: Its economic value is tied to demand for the underlying service.

Governance tokens

A governance token gives holders voting power over protocol decisions.

Common governance decisions:

• Changing fee parameters or reward rates.
• Updating collateral rules or risk parameters in DeFi protocols.
• Choosing how to spend treasury funds.

Examples:

• UNI (Uniswap): vote on protocol upgrades and fee switches.
• COMP (Compound): vote on interest rate models and supported assets.

Often, the same token can have both utility and governance roles. For instance, a token might be:

• Used to pay protocol fees (utility) and
• Used to vote on upgrades (governance).

> Economic nuance: If a token only offers governance but no clear claim on cash flows or fees, its value can be highly speculative, depending on expectations about future protocol success and potential value capture.

5. Thought Exercise: Classify the Token

Try to classify each hypothetical token based on its primary economic role. There can be overlaps, but pick the best category.

1. DataNet Token (DNT)

• Used to pay for API calls to a decentralized data marketplace.
• Token holders do not vote on protocol changes.

1. GovX (GVX)

• Gives holders voting power on protocol fees and new features.
• No direct claim to protocol revenue; fees are kept in a treasury.

1. GameGem (GGM)

• Used to buy in-game items and also to vote on new game modes.

Your task:

• For each token, write down whether you consider it utility, governance, or hybrid, and why.

Then compare your reasoning to the guide below.

<details>

<summary>Suggested answers (click to reveal)</summary>

1. DNT – Primarily utility token

• It is used to pay for access to a service (data APIs). No governance rights.

1. GVX – Primarily governance token

• Main role is voting on protocol parameters. No explicit service access or fee discount.

1. GGM – Hybrid utility + governance token

• Used both for in-game purchases (utility) and for voting (governance).

In real projects, classification often matters for regulation (e.g., whether something might be treated as a security), but here we focus on economic use.

</details>

6. Stablecoins: Purpose and Main Types

A stablecoin is a cryptoasset designed to maintain a relatively stable price, usually pegged 1:1 to a fiat currency like the US dollar or euro.

Why they exist:

• Most cryptocurrencies are highly volatile.
• Many users and applications (e.g., payroll, remittances, trading) need price stability.

As of early 2026, the largest stablecoins by market capitalization are still USD‑pegged coins like USDT (Tether) and USDC (Circle), but regulatory scrutiny has grown, especially in the EU under MiCA, which distinguishes categories like “e‑money tokens” and “asset‑referenced tokens.”

Key collateral / design models

1. Fiat‑backed (off‑chain collateral)

• Each token is intended to be backed 1:1 by cash or cash‑equivalent assets held by a centralized issuer.
• Examples: USDC, USDT, many bank‑issued stablecoins.
• Users rely on: reserves audits/attestations, regulation, and the issuer’s solvency.

1. Crypto‑collateralized (on‑chain collateral)

• Stablecoins are backed by other cryptoassets locked in smart contracts.
• Collateral is usually over‑collateralized (e.g., you deposit $150 of ETH to mint $100 of a stablecoin) to absorb price volatility.
• Example: DAI (MakerDAO), which uses crypto and tokenized real‑world assets as collateral.

1. Algorithmic / under‑collateralized

• Attempt to maintain the peg using algorithmic supply adjustments and incentives rather than full collateral.
• Some models use a dual‑token system (a volatile token absorbs losses/gains; the stablecoin aims to stay at $1).
• Several high‑profile algorithmic designs have failed (e.g., TerraUSD (UST) lost its peg in 2022), leading to strong skepticism and regulatory concern.

> Key idea:

> Stablecoins trade off capital efficiency (how much collateral is needed), decentralization, and risk. Fully fiat‑backed coins are capital‑efficient but centralized; crypto‑collateralized coins are more transparent but capital‑intensive; algorithmic coins aim for efficiency but have shown high failure risk.

7. Worked Example: How a Crypto‑Collateralized Stablecoin Works (DAI‑like)

Consider a simplified version of how a DAI‑like stablecoin works on Ethereum.

1. User locks collateral

• Alice deposits ETH worth $150 into a smart contract (a “vault”).

1. Minting stablecoins

• The protocol allows her to mint up to $100 of stablecoins (e.g., 100 DAI) against her collateral.
• This is a 150% collateralization ratio (150/100).

1. Using the stablecoins

• Alice can spend or lend those 100 DAI.
• The protocol tracks her debt: she owes 100 DAI plus some interest/fees.

1. Price drop and liquidation

• If ETH price falls and her collateral becomes worth only $120, her collateral ratio is now 120%.
• If this falls below a liquidation threshold (say 130%), the protocol can liquidate her position:
• Collateral is sold to repay the 100 DAI debt.
• Remaining collateral (if any) goes back to Alice.

1. Peg maintenance

• If DAI trades above $1 (e.g., $1.02), users are incentivized to mint DAI (by locking collateral) and sell it, pushing the price down.
• If DAI trades below $1 (e.g., $0.98), users are incentivized to buy cheap DAI on the market and repay their vault debt, reducing supply and pushing the price up.

This design uses over‑collateralization + liquidation + incentives (arbitrage) to keep the price near $1.

8. Token Supply, Issuance, and Inflation

A core part of any token’s economic design is how supply changes over time.

Key dimensions

1. Initial supply

• How many tokens exist at launch?
• Are they pre‑minted or emitted over time?

1. Issuance schedule

• How are new tokens created (if at all)?
• Examples:
• Bitcoin (BTC): new coins created as block rewards, with a halving roughly every 4 years; maximum supply 21 million BTC.
• Ether (ETH): issuance changed with Proof of Stake (The Merge in 2022) and EIP‑1559 (2021), which introduced base fee burning. ETH supply can now be slightly inflationary or deflationary depending on network usage.

1. Inflation vs deflation

• Inflationary token: supply increases over time (e.g., via staking rewards, block rewards, or ongoing emissions).
• Deflationary token: net supply decreases (e.g., due to burning exceeding issuance).

1. Distribution and vesting

• Who receives new tokens? Miners? Stakers? Developers? Early investors? Community?
• Are tokens locked and vested over time to reduce immediate sell pressure?

Why this matters economically

• Security incentives: Native coins often pay issuance rewards to miners/stakers. Too low rewards can weaken security; too high can dilute holders.
• User incentives: Utility and governance tokens may use emissions to bootstrap adoption (e.g., liquidity mining) but risk long‑term sell pressure.
• Perceived fairness: Highly concentrated or opaque token allocations can undermine community trust.

> Always ask: Who benefits from new token issuance, and who is diluted? This is central to understanding incentives and long‑term value.

9. Quick Check: Supply and Incentives

Answer the question below, then check the explanation.

10. Review Key Terms

Flip through these flashcards to reinforce the main concepts.

11. Mini Design Exercise: Sketch a Token Model

Apply what you’ve learned by sketching a simple token design.

Scenario:

You are designing a decentralized file‑storage protocol. Users pay to store and retrieve files; storage providers supply disk space.

Task: On paper or in a text editor, answer these questions:

1. Native vs token

• Are you building your own blockchain with a native coin, or launching a token on an existing chain (e.g., Ethereum)? Why?

1. Utility and governance

• What is the utility of your token? (e.g., pay for storage, staking by providers, discounts?)
• Will it have governance rights (e.g., voting on storage pricing, protocol upgrades)?

1. Stablecoin or volatile token?

• Do you want users to pay for storage in a stablecoin (predictable in fiat terms) or your volatile native token? How does this affect user experience and provider risk?

1. Supply and issuance

• Is there a fixed maximum supply or ongoing inflation?
• Who receives new tokens (storage providers, developers, treasury, early backers)?
• How do you prevent excessive dilution of long‑term holders?

1. Risk reflection

• Identify one main risk for users and one main risk for token holders in your design.

You do not need a perfect design. The goal is to practice linking economic choices (utility, governance, stablecoin vs volatile, issuance) to incentives and risk.