Blockchain networks require coins or tokens for several fundamental reasons, each contributing to the functionality and security of the network:
1. Medium of Exchange
Tokens or coins serve as a medium of exchange within blockchain networks, facilitating the transfer of value between participants. This is essential for executing transactions and interacting with various applications within the blockchain ecosystem. For example, Bitcoin allows users to send and receive payments, while Ethereum's Ether is used to pay for transaction fees and computational services[1].
2. Incentivization
Blockchain networks often rely on participant activity to maintain network security and functionality. Coins or tokens provide a financial incentive for users to contribute their computing power or resources. This is particularly evident in networks like Bitcoin, where miners are rewarded with new bitcoins for verifying transactions and securing the network[1][2].
3. Governance
In decentralized blockchain networks, governance is typically managed by token or coin holders. These holders can propose, vote on, and implement changes to the network's protocol. This form of on-chain governance helps ensure that the network evolves in a way that benefits its stakeholders. For instance, MakerDAO uses its MKR token to allow holders to vote on important decisions, such as the adjustment of financial risk parameters[1].
4. Representation of Assets
Tokens can represent a variety of assets on a blockchain, making them highly versatile. This process, known as tokenization, allows for the digital representation of physical or intangible assets, such as real estate, stocks, or intellectual property. Tokenization can increase liquidity, reduce transaction costs, and democratize access to investment opportunities[1][6].
5. Utility within Ecosystems
Many blockchain projects issue utility tokens that provide users with access to specific functionalities, such as using decentralized applications (dApps) or accessing network services. These tokens are essential for interacting with the ecosystem's offerings and can also be used to reward users for their participation or loyalty[3].
