Token Generation Event: Meaning, Token Types & More

As blockchain technology and the cryptocurrency industry mature and push the boundaries of what’s possible, funding remains an issue of great importance. TGEs are central to the birth and crucial early days of today’s crypto start-ups, but what does TGE mean?

To examine the past, present, and future of token generation events in crypto, it is important to first look at some of the basic building blocks of a cryptocurrency.

So, if you want to understand what TGE means, let’s see what blockchain-based coins and tokens are.

What is a Coin?

Coins are very important for the blockchain they exist on because they perform one or more crucial functions within the network. Generally, the primary function of a coin on its blockchain is to incentivize consensus.

Broadly speaking, the top blockchains use two main types of consensus mechanisms, proof-of-work (PoW) and proof-of-stake (PoS).

In both systems, the blockchain’s coin, such as BTC on the Bitcoin blockchain and ETH on Ethereum, rewards the network participants who produce blocks and reach a consensus on their validity.

In Bitcoin and other proof-of-work chains, these participants are called miners. They run expensive hardware dedicated to producing and validating blocks and are rewarded for this work in BTC. In Ethereum, validators are the name given to block producers and validators, and they’re rewarded in ETH.

Instead of lots of hardware, PoS validators bond the network coin to the protocol. The more they bond, the more they earn, but on the other hand, the more they lose if they act maliciously.

What is a Token?

The terms “token” and “coin” are often used interchangeably, but there is one key difference between the two. As mentioned, blockchains have their own coin, which is most often used for security and consensus.

A token, instead, is a cryptoasset that resides on top of another blockchain. The Ethereum blockchain is an excellent example of this since it has its own coin called Ether or ETH but also hosts a multitude of other tokens. Some of these tokens represent prominent projects in their own right, such as Chainlink’s LINK or ImmutableX’s IMX.

These tokens take advantage of the underlying blockchain’s security, consensus, and other benefits, such as Ethereum’s EVM (Ethereum Virtual Machine). EMV lets developers create smart contracts and decentralized applications (dApps).

If every single project had to have its own blockchain and coin, we’d never enjoy the interoperable ecosystem of dApps that several blockchains like Ethereum and Polkadot currently host.

Types of Tokens

Even though coins are more important to their native blockchain than tokens are, tokens have a wide variety of use cases in their own right. Based on these use cases, we can categorize them into the following types:

#1. Utility Tokens

Utility tokens exist to serve a particular function or set of functions within a decentralized application’s ecosystem. This could be to incentivize certain behavior, including securing a second layer, pay fees across a protocol, or as a currency within the dApp.

DAI, for example, is a token on Ethereum called a “stablecoin,” meaning that its utility is to remain stable at $1. The previously mentioned LINK token secures Chainlink’s oracle network and incentivizes its use, while The Sandbox uses its SAND token as an in-game currency.

#2. Security Tokens

Security tokens are a class of tokens that resemble classic securities such as stocks and bonds and are designed to provide projects or companies with the ability to raise capital. Given the pressure exerted on older cryptocurrencies by various regulators, these tokens are often designed from scratch to adhere to existing security regulations.

Also referred to as “tokenized securities,” blockchain-based tokens can represent anything from stocks and debts to commodities and real estate. These security tokens, by nature, are easily traded and tend to be built around the U.S. Securities and Exchange Commission’s regulations over securities.

#3. Governance Tokens

Governance tokens are specialized tokens that give the holder a vote over the direction and future of a decentralized entity like a dApp or DAO (decentralized autonomous organization). Since dApps and DAOs are decentralized by nature and don’t have a board of directors per se, governance is transparently managed by token holders, often on-chain.

The previously mentioned DAI stablecoin is part of MakerDAO, a decentralized protocol governed by holders of the MKR governance token. There are plenty of governance tokens, but MKR and DAI are examples of how a single project or protocol can have separate tokens for utility and governance.

#4. Non-Fungible Tokens (NFTs)

NFTs are an extremely popular class of tokens that could be considered utility tokens but deserve their own mention. Each NFT is verifiable by the blockchain and represents ownership over a unique digital or real-world asset.

What is a Token Generation Event?

A token generation event, which is what TGE means, is an approach blockchain firms and start-ups use to raise funds to get their project off the ground while avoiding regulatory scrutiny.

These initial fundraisers used to be referred to as “ICOs” (Initial Coin Offerings), but they have since seen rulings from regulators suggesting that the sold tokens are taxable securities. However, token generation events are set up in such a way as to not fall under the classification of a security.

A project team builds up to a TGE gradually, though. First, the project has to be outlined, and the token’s legal compliance has to be established. Following this framework being drawn up, the team publishes a whitepaper detailing everything concerning the token, from technical aspects to business mission.

Only then does the team consider a TGE, and it’s common that the token itself only constitutes a small proportion of the product as a whole. It would play a role in the ecosystem, and a significant one at that, but it isn’t the be-all and end-all of the project.

In the TGE itself, the project team launches the token on the relevant blockchain and executes whatever initial distribution disclosed earlier. Then, the tokens are put up for sale and made available to the public.

TGE vs. ICO: What Are the Differences?

An ICO is very similar in spirit to a TGE, and there’s still a debate as to whether the two are actually any different. Both exist to crowdfund the capital needed for a cryptocurrency-based project to get off the ground, and both involve the sale of tokens to members of the investing public who might see value in them.

However, many ICOs during the boom of 2017/18 focused on the value and economic potential of the coin being sold. This was a phase in crypto when the technology was still maturing, and concepts like DeFi (decentralized finance) were largely still conceptual. Many early crypto projects tried to be the next Bitcoin and sold themselves as such.

TGE’s true meaning may be just a marketing tactic, given that it focuses on creating tokens. The term ICO is very similar to the IPOs (Initial Public Offering) used for taking traditional securities to a wider market.

Regardless, the scrutiny of regulators remains very much fixed on cryptocurrencies, even as bankers develop their own controllable currency products called CBDCs (Central Bank Digital Currencies). Decentralization threatens the establishment, and the long arm of regulatory oversight is just one of many tools to be employed in this particular effort.

Key Takeaways

The nature of coins and tokens is key to understanding the true TGE meaning, and the diversity of tokens found in the market today clearly demonstrates how much the blockchain industry has matured.

Tokens can have various uses, from utility to governance, and are generally created and distributed in the early stages of a project. This is done in a TGE, just like with an ICO, IEO, or IDO. Fundraising is critical for a start-up, and many crypto projects are “garage” affairs in the classic sense.

As regulators continue to scrutinize the ICOs of the fairly recent past, compliance with existing regulations and a change in branding have seen more and more start-ups conduct TGEs rather than ICOs for funding to make their vision a reality.