A token is a type of cryptocurrency that is an asset or specific use and is located in a blockchain. You can use tokens for investment purposes, to preserve value, or to make purchases. Cryptographic tokens are a set of rules encoded in a smart contract.
Tokens are related to cryptocurrencies, which are special units that give the owner the right to operate on a common decentralized resource. This resource is usually a blockchain. Each token exists only in a particular ecosystem and cannot be used outside this system.
How Do Tokens Work?
Tokens differ from classic cryptocurrencies. When they are created, the process uses an existing blockchain. This greatly simplifies and accelerates the creation process, especially if you compare it with the procedure necessary to create a cryptocurrency. To develop cryptocurrency, you need to create a completely new blockchain from scratch. This process can take a long time and require a lot of labor and money.
In the case of tokens, it is not necessary to create a blockchain or conduct a hard fork. Instead, developers will start by choosing a suitable system from existing ones. Ethereum is considered the most popular and most adapted blockchain — the platform even has several standards for token development. These tokens can be used for different purposes. Although there are many tokens created to also help the general public make transactions without a central control body, these tokens may have other goals. One example is decentralized applications (dApps) that exist in the Ethereum blockchain. Each of them has a specific goal.
For example, Synergy of Serra is a card game that uses its token. It is needed as an in-game currency. However, the fact of using a token indicates that players can not just play, but also earn tokens that can be sold in the future.
Main Types of Tokens
Most digital units of blockchain projects are interchangeable. This means that one token is indistinguishable from the other. For example, 1 USDT will always be identical to any other Tether digital unit. There are also non-replaceable tokens (NFT) on the market. In addition, crypto projects use special accounting units (such as service or exchange stablecoins).
These units are a means of payment. Initially, historically, the exchange tools were precious metals. Then banks began to issue banknotes that could be converted into gold. People trust banknotes and coins and accept them as a form of payment. Crypto tokens have the same function.
Digital units that enable decentralized applications (DApps). For example, stablecoin DAI is pegged to the US dollar. However, its price is maintained through a mechanism built into smart contracts. Therefore, a coin can be called the accounting unit of the platform.
This type of token depends on the application for which it is created. The unit provides security and supports the transactional activity. Platforms coins have a wide range of applications: from servicing playgrounds and digital collectibles (CryptoKitties) to global advertising and marketplaces.
When buying ordinary shares, the investor invests in the company in anticipation of the growth of its capitalization and profit. A person acquires a share in the business to receive dividends. In addition, certain types of shares grant the right to vote at a general meeting of the owners of the company.
Security tokens work in the same way. They serve as evidence that the investor owns part of the company that issued the token.
Security tokens do not always give investors the right to make decisions about the company's activities. However, there is another way to implement this function — Governance token.
This is a type of token that gives its holders the right to make decisions on the project protocol, its product, and its functions. Investors can influence events within the startup's activities: the introduction of a new function, changing the distribution models of blockchain accounting units, and even the reconstruction of the management system.
Utility tokens attracted attention in connection with the ICO boom in 2017. Then many projects released their accounting units to raise capital to implement their ideas. The initial offer of coins is a type of crowdfunding campaign in the cryptocurrency market, an analog of IPO in stocks. Startups are launching ICOs to raise money for a new project, application, or coin. Utility tokens served as a tool for funds and became a means of speculation from investors who bought the project's accounting units in the hope that they would make a big profit.
And yet service coins have a clear goal — to ensure work on the network. The greater the demand for the protocol, the higher the price of the unit and the project as a whole.
Management tokens represent ownership of a decentralized protocol. They grant token holders certain rights that affect the direction of the protocol's development. This can include developing new products or features, spending a budget, integration or partnership, and much more.
In general, the exercise of this influence can take two forms. First, management token holders can propose changes as part of the formal proposal submission process. If the proposal meets certain criteria and is put to a vote, they can use their tokens to vote on the proposed changes. The specific mechanisms and processes by which these rights are implemented differently in different protocols.
In the presence of flat and distributed ownership, as well as the absence of a certain leadership, as in traditional hierarchical organizations, management tokens are an important decision-making mechanism for decentralized autonomous organizations (DAO).
APPCs are digital distributed protocol units for mobile and desktop programs based on the blockchain. Virtual currency with which users (even those without bank accounts) make online transactions, including app purchases (IAPs). You can also earn APPC without having to have a card.
In 2021, non-fungible tokens were in the spotlight. NFT gained popularity thanks to the blockchain game Crypto Kitties. Users created and bred unique digital cats. To upgrade their pet, they bought additional features and paid ETH for them. Each cat has a set of attributes and a unique number.
Some instances are very rare. They can be seen as investments. For example, CryptoKitty # 896775 was sold for 600 ETH. The possibility of exchanging images of these creatures was realized thanks to the Ethereum digital units of the ERC-721 standard. NFTs are used in the following areas:
- Gaming. NFT allows players to exchange various assets: armor, weapons, artifacts, and others.
- Collectibles and works of art.
- Digital identification. If users save their data in the blockchain, this will eliminate bureaucratic friction.
Accounting units of debt — crypto assets confirming obligations on mortgages, corporate bonds, and other common lending mechanisms. This type of digital coin pays regular dividends. However, like the credit instruments on which they are based, Debt tokens are exposed to the risks of depreciation or non-fulfillment of debt obligations.
They record the ownership of assets: goods, real estate, works of art, and others. Smart contract technology promotes transparent, equitable, and equitable sharing of property among investors.
Ethereum Blockchain Tokens
Ethereum is considered one of the largest altcoins. This system has its blockchain and ETH cryptocurrency. The network was designed to provide new opportunities for decentralized application developers. However, many developers used Ethereum as a way to create completely new cryptocurrencies. Cryptocurrencies developed based on the Ethereum blockchain are called tokens. Uniswap, IDEX, MakerDAO, and CryptoPunks are considered one of the most popular tokens of the Ethereum blockchain. Each has its token and serves a specific audience.
Cryptocurrency Exchange Tokens
Sometimes tokens are created not for applications, but for assistance in the process of exchanging digital currencies. Cryptocurrency exchange tokens are becoming popular, the most commonly used are BNB or Binance Coin. This is the native token on the Binance network, which is used as a gas token for transactions made on the platform.
When you sign up for Binance, you can convert your deposit to BNB. From now on, you can exchange BNB for other cryptocurrencies. The advantage here is that the use of tokens reduces the cost of commissions.
There are other types of tokens. One type of token that is also gaining popularity is collectibles. These are digital assets that can be in the form of virtual pets, cards, etc. You usually buy a specific token that serves as a collectible for the platform. This token is a card or some other collectible.
Reward tokens are another example of using digital assets. They are usually provided as compensation or remuneration in the network. Tokens can be charged for certain tasks. People can register on the network, participate in events, and solve certain tasks. For this, the corresponding number of tokens will be received on their balance sheet, depending on the current reward scheme.
Differences Between Cryptocurrency and Tokens
The biggest difference between tokens and cryptocurrency is that cryptocurrency has its blockchain — while a token is a type of digital asset that is not developed on a new blockchain. Cryptocurrency is the blockchain's asset and is considered a coin, and existing blockchains are used to create a token.
A token with purchasing power is very similar to cryptocurrency. Cryptocurrency is the digital currency of the blockchain. Cryptocurrency always has its platform blocked and is used as a reward for miners — people involved in mining. Cryptocurrency is also used to conduct transactions in this blockchain network.
Thus, cryptocurrency performs the following functions:
- Settlement unit in the blockchain for making payments
- Participates in transactions
- Incentive for miners
- Is a value store
In the cryptocurrency world, a token has two main meanings:
Token As a Financial Instrument
A token is a financial instrument awarded to an investor in the ICO process for financial assistance to the project. Depending on the project, the token may be a company share for which the investor receives dividends (this type of token is rare) or a kind of token that can be paid in the company's domestic market.
For a better understanding of the concept of "token," we give an example: all known tokens in the subway are also tokens. You buy them at the ticket office and you can take a metro trip for them. At the same time, you will not be able to pay them anywhere except the metro, in addition, the tokens of the St. Petersburg metro will not operate in the Kazan metro.
The metro in our example is the company's internal market, beyond which tokens have no value. The metro ticket office is an analog of the cryptocurrency exchange, where you can buy these very tokens.
Token As Digital Key in the Blockchain
A token is a digital key in a blockchain that performs an information security function and is used to identify a user.
Such a token acts as a digital signature of the user for access to information in the blockchain network.
The most common first token value is as a financial instrument. With such a token you can:
- Receive dividends (if the token acts as a share of the company)
- Use token as project local currency
- Sell tokens for liquid cryptocurrency on exchanges
How Do I Purchase and Store Tokens?
The assets of companies can be acquired through various trading exchanges and exchanges. In addition to traditional methods, a personal transaction between the seller and the buyer on mutually beneficial terms is not excluded. The acquisition of tokens is very similar to the process of acquiring and trading cryptocurrencies and is very often available through our usual electronic wallets.
The storage of such coins is also no different from the storage of cryptocurrencies. As a rule, the creator of the token releases his wallet application, where you can store your virtual asset. Of course, this separate application is part of a single tokenization platform. As well as for storing cryptocurrencies, there are their own security rules for storing tokens.