Mintable Tokens VS Mineable Tokens: What’s the Difference

2021/09/01 10:40:00

Token minting is a concept in tokenomics that represents the creation of new tokens on any of the supported smart contract platforms like Ethereum. They are different from the traditional mineable tokens (ETH, BTC, etc) in a sense that they don’t require any physical resources or block production and validation process to mint new tokens.

ERC-20 tokens are a perfect example of token minting, where new tokens are created on the Ethereum platform that follow the ERC-20 token standard. Similarly, ERC-721 is the Non-Fungible Token Standard that allows minting of tokenized NFTs on the Ethereum platform.

Mintable tokens can have a hard cap and a soft cap, and new tokens can be minted to increase the supply depending upon the underlying business model. On the contrary, minted tokens can be burned to decrease the supply, a method that is widely used in algorithmic and crypto-backed stablecoins such as DAI and TerraUSD.

Difference Between Mintable Tokens And Mineable Tokens

Many people confuse mintable tokens with mineable tokens because both of them are related to the creation of new tokens. However, they are very different from each other.

Mineable Tokens

Mineable tokens are those tokens that are created in the mining process in a Proof of Work (PoW) based blockchain platform. The same terminology is used for tokens that are issued in the Proof of Stake (PoS) based blockchain platforms. In both of these cases, the miners, or the validators, are responsible to secure the network and produce blocks. To compensate for their activities, the protocol issues them some platform tokens that are newly minted.

Mineable tokens are issued in accordance with the underlying consensus rules. For the Bitcoin network, the current block reward is 6.25 BTC per block and for Ethereum, it currently stands at roughly 2-2.5 ETH per block. BTC has a fixed supply and the block reward is halved every 4 years or after every 210,000 blocks mined in a process known as halving.

Mintable tokens

Mintable tokens are the kind of tokens that are created without performing any underlying consensus related activity. These tokens are mostly minted (created) on smart contract platforms, with Ethereum being the largest and most popular for minting new tokens.

On a granular level, smart contracts have a function to mint new tokens according to the predetermined supply. Once the function is triggered, new tokens are created which are then distributed in the market.

The supply of mintable tokens falls under two categories:

Fixed Supply: The fixed supply model is used to bring scarcity that will increase the value of the underlying asset. Fixed supply is often termed as deflationary because once the supply is reached, no new tokens are minted and if the demand rises, the price of the token will increase.

Continuous Supply: The continuous supply token model is inflationary, which means new tokens are minted on a regular basis for a purpose such as a utility. The main focus on a continuous supply model is to increase the underlying utility and benefits instead of increasing the price. The continuous supply model is also used by stablecoins that maintain a 1:1 peg with the US dollar, and the protocol makes sure that each token doesn’t exceed or decrease from the $1 price.

Examples of Mintable Tokens

Let’s explore two of the most prominent examples of mintable tokens - NFTs and Stablecoins. Although these NFTs and Stablecoins can be minted on any smart contract platform, we will focus on Ethereum since it's the most popular choice among creators.

NFT

If you’re following the crypto space, you might have heard about the NFTs. NFT is the short form of ‘Non-Fungible Tokens’. They are non-fungible because they are unique and can’t be replaced with something else (or divided into sub-parts). People have been tokenizing art work, digital music, etc., as NFTs and selling them on NFT marketplaces such as OpenSea.

NFT’s are minted on Ethereum using the ERC-721 token standard. Before selling an NFT, it has to be minted on the Ethereum platform as an ERC-721 token, that also allows the creation, ownership, and transfer of an NFT to a different address.

Stablecoins

Stablecoins are the kind of minted tokens that maintain a 1:1 peg with the US dollar. Each stablecoin is worth $1, and the protocol adjusts the price to maintain the $1 peg. Most stablecoins follow the continuous supply model where the supply is adjusted to maintain the peg.

The model is very simple. If the price of a stablecoin increases from $1, the supply is decreased to decrease the price and bring it back to $1. If the price of a stablecoin decreases from $1, the supply is increased to increase the price and maintain the peg.

DAI is a perfect example of a crypto-backed stablecoin where the peg is maintained using cryptocurrency as collateral (Ethereum and a few supported ERC-20 assets). It follows a similar model of continuous supply, where the peg is maintained by increasing or decreasing the supply.

Closing Thoughts

Before the launch of Ethereum, the only way to mint your own token was to ramp up an entirely new blockchain protocol with a consensus algorithm. Ethereum brought a revolution in the blockchain space by introducing smart contracts that can be used to build custom protocols and mint new tokens without worrying about the consensus and protocol-level details.

Minting new tokens allows developers and companies to raise funds for their projects and develop an economic model for their application to incentivize participants. However, not every token is worthy of an investment so investors should do their own research before investing in any token.