Author: Miles Jennings & Scott Duke Kominers & Eddy Lazzarin, a16z crypto; Compilation: Golden Finance xiaozou

Distinguishing between network tokens and company-supported tokens can be challenging, because both of these tokens may be practical and can obtain some value from the on-chain functions of the blockchain and the off-chain efforts of the company. However, it is crucial to distinguish between these two tokens: the risks posed by the network tokens posed very different to the company's support tokens to holders and should therefore be treated differently under applicable law. So, what is the difference?

What distinguishes network tokens from companies' support tokens is that network tokens mainly accumulate value from blockchain or smart contract protocols. This is crucial because these systems can operate autonomously and decentralizedly – ​​without human intervention or control. Therefore, a blockchain-based network can achieve true openness: the system's network effects are captured on the chain and belong to the token holders, which can be accessed by anyone in principle and built based on these network effects.

In contrast, companies support tokens to accumulate value mainly from off-chain systems or sources that cannot operate independently—these are centralized systems that rely on human intervention and control. This relationship is often very obvious, such as when the token price is pegged to the profits of off-chain applications, products or services, or when the token is practical in these systems. But it may also be difficult to detect, for example, a purposeless or practical token that uses the company's brand may imply that the company will drive the token value. In either case, if the token is inherently associated with a system that cannot operate autonomously and is mainly derived from — or expected to obtain — its value, the token is supported by the company. Lack of autonomy means that any relevant network, although likely to appear to be public, is actually closed—like a web2 social network controlled by a certain company alone—and therefore, the network effect of the token belongs to the company that controls the system rather than its users.

These differences in network design (closed and open) have practical economic and regulatory consequences. Because network tokens are associated with open networks that are uncontrolled, they are more similar to commodities—can operate in a way that excludes unilateral influence or constructs risks associated with network tokens. This elimination of trust dependence distinguishes network tokens from securities, and will further strengthen the elimination of trust if the network directs value to network tokens through its functions (such as programmatic purchase and destruction).

In contrast, a company-backed token has a trust dependency similar to a securities: if the value of a token comes from a closed network controlled by a single entity, the entity can unilaterally change the expected value of the token. For example, an entity with control can arbitrarily change the utility of the token or increase the supply of tokens, or even shut down the entire system. This strongly suggests that when people invest in a company supporting tokens, securities laws should be applied.

The following are two examples to further highlight this difference:

left;">*ETH is a typical example of network tokens. It enables holders to trade on the Ethereum network and gives holders economic benefits in the network. The network is decentralized and can operate autonomously (no individual or management team controls it). Therefore, the SEC itself has concluded that the securities law does not apply to ETH.

*FTT is an obvious example of a company supporting tokens. Its value relies entirely on the ongoing operation of the FTX exchange, which itself is a centralized exchange operated and controlled by the company. FTX companies extract part of the profits from the operating exchanges to repurchase FTT, thereby driving its economic value. Therefore, FTT is essentially the profit interest of FTX—its utility and value controlled by FTX—being bound by the securities law.

At the two extremes, there may be ambiguous situations. But it is usually possible to determine whether a token is a network token or a company-supported token by answering three questions:

*Is the system's network design open? * Is the system's network effect attributable to the protocol and token holders? * Does the system allow protocol and token holders to accumulate value independently? If the answers to all of the above questions are yes, the system should theoretically continue to run without an initial development team, even if the functionality is weakened. This is crucial because it means that the system can run without control.

Let's look at a few more examples to better understand these concepts:

The tokens associated with most decentralized exchange smart contract protocols (DEXs) are network tokens, although initial development teams usually operate front-end websites and off-chain routing software for these protocols. Why?

DEX protocols are usually open networks, meaning that not only the initial development team, but anyone can operate front-end websites and their own routing software on top of the protocol.. This means that the network effects of most DEXs are attributable to protocol and token holders, not the companies that build them. Specifically, liquidity that is crucial to the DEX operation is controlled by the protocol itself, not the initial development team.

Value accumulation can occur in multiple places, but the key question is: Can value accumulate in the hands of protocol and token holders independently of the initial development team? DEX usually embeds its own programmatic economic mechanism (usually called a "fee switch") into the protocol, and front-end website operators also regularly charge users. The key is that if the economic mechanism of network token value is independent of the off-chain products and services of the initial development team and does not depend on them, then the charging of fees at the interface level does not constitute a barrier. In other words, if the protocol fee switch is turned on, the value of the network token will accumulate independently into the hands of token holders, regardless of the interface operation of any single company (including the initial development team). This means that network tokens are economically independent of the initial development team and are not under its control.

So, even if the initial development team abandons the DEX that meets all the above standards, the DEX can continue to run. Therefore, the system's tokens should be correctly classified as network tokens.

Take the game as an example. Although there are many games in the full chain, most web3 games rely on off-chain services (such as servers). But not being a full-chain game does not mean that the game cannot own online tokens. If core assets—items, characters, etc.—are issued and recorded on the chain without being controlled by any single party, then it can be said that the system runs like an on-chain network. Therefore, the network can be open, allowing anyone to build with the core assets of the network (i.e. if that privilege is not reserved for the initial development team), meaning that the network effect of the game can be attributable to the token holder rather than the original game developer. The programmatic economic mechanism aimed at accumulating value into game tokens will support the recognition of tokens as network tokens—the system can continue to run and create value without an initial development team.

Let's look at the decentralized social media protocol. Many of these protocols use combinations of on-chain and off-chain components. To make a social network open and its network effects belong to token holders rather than centralized companies, users must be able to find each other and communicate even if other parts of the network try to prevent this from happening. One way to achieve this is to keep the relevant authentication keys for registering and posting social media messages on the chain and allow any developer to build their own clients on the network — while storing posts and other user interactions through an off-chain “centric” network, each hub replicates the network’s data and status. Due to these characteristics, it can be said that the network is open - anyPeople can create an account using a publicly accessible blockchain smart contract and then publish content using that account. The network has strong protection against centralized control because hubs are maintained by multiple parties. Despite the existence of centralized user applications that provide network access, such networks can still own network tokens. The independence of the system can be further enhanced by adding a programmatic economic mechanism that accumulates value into network tokens.

Now let's imagine what would happen if Apple launched the App Store token. Users may enjoy App Store discounts when holding tokens, or they can use these tokens to pay for the app, and a portion of all blockchain-based app payments in the App Store can be distributed back to the token holder through smart contracts. Despite the use of blockchain technology, Apple's tokens will belong to the company's support token because: the system is closed, and the use of blockchain technology will not allow third parties to take advantage of Apple's network effects and build an application store in the system that competes with Apple. In addition, the value comes from Apple-controlled proprietary off-chain products and services (app store). Even if there is an on-chain programmatic economic mechanism, all value accumulation will stop once Apple closes the app store. Therefore, the risk characteristics of tokens will be closer to APPL stocks, which are very different from online tokens, and the securities law may be applied.