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sorry in advance if this is the wrong forum for such a question. I just want to understand something at a high level.

When projects, for example new video games are launching on a Blockchain (e.g. on Ethereum), they will typically create their own token, and people will buy it, it will have a market cap, etc.

What is the purpose of this?

If the game/web application has interactable and purchasable items or features, then they could just make a smart contract to accept ETH as payment. Why does $NEW_DAPP need its own $NEW_COIN ?

Some ideas I had, but I'm not sure if they're right:

  • The $NEW_COIN will be specific to the application and provide a discount to its utility somehow (how?)
  • The $NEW_COIN being bought will represent shares being invested in the project, to incentivize the creators to finish it fully, add features, add support, etc.

Again though, the main concept I'm not understanding is why making your own coin, say an ERC-20 token, is more useful than just transacting in ETH.

Thank you for any explanations, use cases, specific examples, etc. Really trying to wrap my head around this.

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    It just makes people think they own something "unique" and, as a cynical person, I would say it is a way for them to make money.
    – Itération 122442
    Oct 28, 2021 at 6:27
  • I'm sure there's legitimate uses for creating novel ERC-20 tokens, just not entirely sure what they are. Mostly trying to think about this in terms of 'why make something new instead of just using ETH'
    – JDS
    Oct 28, 2021 at 16:27

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I'm going to take the example of the ERC-20 Token. While the ERC-20 and ERC-721 have different goals, I believe the advantages in complying to the standard is pretty much the same for both.

Through the ERC-20 interface that your token must implement, you get access to several interesting features :

  • Creating new tokens (minting) on your own terms
  • Destroying tokens (burning) on your own terms

So you already have some control over the economics of your token. With a fixed market cap, minting or burning tokens allows you to influence the price of your token / product.

Additionally, you define the rules for the following :

  • Who can use your token
  • Under what conditions

So in essence, it gives you control over the economics of your business. But you could do that with a custom contract, the following point is the most important in my opinion.

Complying with the standard gives visibility to your token, just look at the etherscan ERC-20 listing, your token wouldn't be visible in this list as an ERC-20 if you did not use that interface.

Visibility + standard interface implementation allows many of the existing services to be instantly compatible with your token.

For example, a metamask wallet couldn't access your custom token if you don't respect the ERC-20 making it difficult if not impossible for the average user to interact with your contracts. You would also never be listed on exchanges with a non ERC compliant interface...

I hope that answers your question.

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  • I understand your points, I think you're explaining some of the mechanisms really well. What I don't necessarily understand is why are we making new ERC-20 tokens rather than just using ETH?
    – JDS
    Oct 28, 2021 at 16:25
  • You could do everything with ETH it is true, but the true motivation is what I told you, which is just my take on the official EIP 20 motivation (eips.ethereum.org/EIPS/eip-20#motivation) : "A standard interface allows any tokens on Ethereum to be re-used by other applications: from wallets to decentralized exchanges." It allows anyone to enter the blockchain ecosystem and benefit of every existing services as long as they respect the established standard.
    – hroussille
    Oct 28, 2021 at 17:21

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