Tokens and smart contracts: what they are and when they make sense for a business

Blockchain, tokens, smart contracts: words heard for years, accompanied by big promises and equal scepticism. For a company the useful question is not "is blockchain the future?", but a simpler one: does it solve a problem of mine better than an ordinary solution would?

In this guide I explain in simple terms what tokens and smart contracts are, when they make sense and when they do not. It is neither legal nor financial advice: for those aspects you need a competent professional.

What a blockchain is, in two lines

It is a shared ledger, kept by many computers together, in which the information written cannot be changed or deleted in secret. Nobody is its sole owner, and anyone can verify what is written. This feature is both its strength and its limit.

What a token is

A token is a digital unit recorded on a blockchain. There are two broad families.

• Fungible tokens: they are interchangeable, like units of a currency or points in a loyalty scheme. They follow established standards (for Ethereum-compatible networks the best known is ERC-20).
• Non-fungible tokens (NFTs): each one is unique and represents something specific (an artwork, a ticket, a certificate). Standards exist for these too (ERC-721).

A token can represent a right, an access share, a loyalty point, or proof of ownership or participation.

What a smart contract is

It is a program that sits on the blockchain and runs by itself when certain conditions occur, with no need for an intermediary. For example: "when this payment arrives, issue this token". It governs the creation, transfer and use of tokens.

Two characteristics to keep in mind:

• It is public and verifiable: anyone can check what it does.
• It is hard to change after publication: a mistake may be impossible to fix, and can be costly.

When it makes sense to use them

Blockchain makes sense when you truly need these things.

• Transparency verifiable by third parties, without trusting a single operator.
• Digital ownership that the user controls alone, even outside your platform.
• No intermediaries, or agreements between parties that do not fully trust each other.
• Unalterable recording of important events (for example certifications).
• Interaction with an existing ecosystem, where users already have digital wallets.

When it is not needed

Much more often than you would think, a traditional database is the better choice.

• A single party manages the data and the others trust it.
• Frequent changes and corrections are needed.
• The audience neither has nor wants a digital wallet.
• Transaction costs are not justified by the benefit.
• The data is confidential and must not be public.
• The main aim is a novelty effect, with no real problem.

An honest consultant will tell you: if blockchain is not needed, it is better not to use it.

The costs to allow for

• Development and testing: writing a reliable smart contract takes time and care.
• Independent review (audit) before handling significant value, recommended.
• Network fees: every operation on the blockchain has a cost, which varies with the network and the moment.
• Integration with the site, app and users' wallets.
• Maintenance and monitoring over time.
• Legal and tax advice, where the project involves value or rights.

The main risks

• Irreversible mistakes: a defect in the contract may not be fixable.
• Security: contracts are attack targets, and mistakes are paid for directly.
• Evolving regulation: the rules on tokens and crypto-assets change and depend on the use. Before launching a project a legal opinion is worth having.
• Complex user experience: not everyone knows how to use a digital wallet.
• Volatility of values, if the project depends on them.

How to proceed seriously

A responsible path includes:

1. Understanding the problem and weighing alternatives, including the one without blockchain.
2. Choosing the network on the basis of costs and target audience.
3. Using established standards instead of inventing from scratch.
4. Writing automated tests for every expected behaviour.
5. Trying it on test networks before publishing on the real one.
6. Having the code reviewed by an independent person.
7. Integrating wallets and the site with a simple experience for users.
8. Monitoring after publication.

Questions to ask yourself before starting

• Which precise problem do I want to solve?
• Why would a traditional database not be enough?
• Who are the users and do they already have a digital wallet?
• What happens if the contract has a mistake?
• Which legal and tax aspects must I check?
• How much will development, review and fees cost?

If you want to prepare a project well with a developer, also read How to write a brief for a developer.

A reasoned example

An association wants to give its members a digital membership card. Is a token really needed? If the card is used only inside the association, which remains the sole operator, a database with a private area is simpler, cheaper and editable. If instead members should be able to prove their participation to third parties as well, without going through the association, and reuse it in other compatible services, then a token can make sense. The deciding question is always the same: what does blockchain give me that a database does not?

Why entrust it to me

I have been programming since 1999, with more than 300 projects delivered and about 30 agencies as an external developer. I have worked with smart contracts, tokens and wallet integration in web applications, on Ethereum-compatible networks, with established standards such as ERC-20 and ERC-721, automated tests and deployment first on test networks. I tell you honestly whether blockchain is really needed for your project, and proceed only if it makes sense. I work from Rome and remotely.

If you have an idea involving tokens or smart contracts, write to me: a chat of about 20 minutes, no strings attached, then a written, free proposal. The service is in Blockchain, token and smart contract development.