Tokens – what are they, how do they work and how do you use them? Cryptocurrency and tokens

Terms such as “token” and “tokenization” are becoming more and more frequent within the context of cryptocurrency. They’re steadily gaining in importance in the world of digital currency. Let’s find out what exactly is a token, what kinds of tokens are there, how do they work and what can they be used for.

Terms such as “tokens” and “tokenization” are becoming more and more frequent within the context of cryptocurrency. They’re steadily gaining in importance in the world of digital currency. Let’s find out what exactly are tokens, what kinds of tokens are there, how do they work and what can they be used for.

The appearance of bitcoin, blockchain and other cryptocurrencies turned out to be an important digital revolution. It influenced payments, investments and other aspects, outside of the finance world. Tokens were a big part of this revolution. They are sometimes used as synonyms for the term “cryptocurrency”, which is a mistake. You cannot use the words token and cryptocurrency interchangeably, even though they are a part of the same world of digital assets. First, we should explain what are tokens.

What are tokens?

Crypto tokens have been known for a long time. In the past, they have been used (and still are today) as access (authorization) codes or as safety elements for banking sessions. Those are just two of their many uses. However, the main purpose of tokens appeared along with the creation of blockchains, especially the Ethereum protocol. That’s when the infrastructure for creating tokens was starting to develop.

What is a token coin? There really is no clear-cut definition of this broad term. To simplify, we can say that it’s a form of a virtual token, or chip, issued during the process of tokenization – which you will read about further on in this article. These virtual chips can be easily sent and received. But they don’t exist in every network (e.g., they’re not a part of blockchain bitcoin). Tokens are sometimes called a subset of cryptocurrency. They represent some assets or application functions. They can represent the digital version of a real object. They’re often used to collect funds through new projects and companies which investors might be interested in.

How does tokens money work?

Tokens can be sent directly from one person or entity to another – there is no need for any mediations. In that sense, they are similar to cryptocurrency. Tokens function based on the architecture of certain blockchains (usually Ethereum). Every one of these tokens carries a certain coded piece of information – and each one is different. Tokens are stored in the form data in blockchains. That’s why every token is guaranteed to be unique.

Crypto tokens and tokenization

In the context of tokens, you can frequently come across the term of tokenization. This word covers both – the generation of new tokens and giving them a set value. As a result of tokenization, a token may carry various claims (e.g., partnership shares or the ability to pay for certain goods and assets). We often talk about tokenization when there is an issue of company or venture shares, in the form of digital tokens. Each one of these tokens has certain conditions which specify the use of these virtual chips. Tokenization is also the digital transformation of a business project based on blockchain and tokens. The process is generally related to creating tokens and setting a certain value for them.

Types of tokens

You should now have a general idea of what a token is and how it works. But you should also know that there is more than one type of token. In fact, there are four different types.

Utility Token

Issued to finance a certain project, it enables access to it, as well as all of its resources and related services. These tokens only work within one system, in which they are a means of payment. They are often issued in order to obtain funds, as part of ICO (Initial Coin Offering), when a company wants to enter the stock market and is building its capital.

Commodity Token

Its value is calculated according to real assets (e.g., gold).

Security Token

It’s treated just like securities. It determines your shares e.g., in a certain company. This type of token replaces traditional securities.

NTF Token

It’s bound to unique goods (e.g., digital goods) and it can be used to buy various virtual resources.

Token standards

Tokens may be based on different standards. Some of them are more popular while others are much less frequently used. Here are some of the most common token standards:

  • ERC-20 – if you are working with tokens, you are bound to come across this type. This standard is based on the Ethereum blockchain. This is the one that participated in the tokens’ incredible growth of popularity;
  • ERC-721 – the standard most frequently used with NFT tokens. Every token generated in this standard is unique and inconvertible. It relates to the values of certain assets (e.g., works of art);
  • other ERCs – less common but also based on the Ethereum blockchain (e.g. ERC-1337);
  • NEP-5 – used with tokens based on the NEO blockchain;
  • BEP-2 – tokens based on the Binance blockchain.

Tokens – currency and cryptocurrency

Sometimes tokens can get mixed up with cryptocurrency. Some people even deliberately use these terms interchangeably. Yes, the difference between them is rather subtle, but you must remember that tokens and cryptocurrency are not the same thing. How do you tell them apart? It’s actually not that hard. When digital money has its blockchain and network – it’s definitely a cryptocurrency. However, tokens use different systems and platforms.

Cryptocurrency is a type of coin, even though it is digital. A token, as mentioned before, is a digital chip with a wider use than cryptocurrency. A crypto token can carry a certain value for investors, in the form of obtained assets. It can be a contest prize or it can even entitle you to a certain discount. You cannot use these terms interchangeably, as synonyms.

How do you create tokens?

Tokens are generated in a certain network (blockchain). There can be many different tokens in one system. Creating a token is not complicated – you only need average programming knowledge. But you have to remember – to create tokens, you need smart contracts. They’re necessary to generate virtual chips. A smart contract can be a computer program or a digital contracts protocol. Blockchains allow you to create smart contracts without limits. However, the transactions which you perform using tokens must be paid for with the cryptocurrency specific for the blockchain (e.g., ETH in Ethereum). You must remember that, when generating new tokens. So, first you have to acquire the right cryptocurrency.

Tokens – pros and cons

The advantages of using tokens are as follows:

  • the possibility of a fast, easy and safe payment when cooperating with a seller who accepts a certain token;
  • the possibility of exchanging them for other tokens or cryptocurrency;
  • large flexibility, allowing to adjust tokens for various applications;
  • big popularity – many exchanges and digital wallets are compatible with tokens;
  • ensuring an access to various assets;
  • the possibility of trading tokenized securities of certain companies on stock exchanges.

The main disadvantage of tokens is their ease of activation. It is a feature that can be used by scammers.

Registering tokens

The person creating a certain token can register it, but it’s not required by any legal provisions. Still, it’s better to do so. It is a way for the crypto token issuer to effectively protect their interests. It’s easy to imagine a situation, where a certain token coin gains in popularity without having its name registered. More tokens arise on the market with the same exact name, taking advantage of the popularity.

Registering the token name allows you to assert your rights in such situations. Moreover, the reputation of a cryptocurrency token often rises after registration. You can only benefit from this step. Before registering your tokens, you have to choose their names – these should be original, so that they can be easily distinguished from others. To ensure that your tokens money is well protected, it’s best to register it in Patent Offices across the whole European Union and United States. You can also consider registering in some Asian countries.

Token SWAP – what does it mean?

There is a possibility to perform a Token SWAP. What does that mean? The name itself should give you some information – it’s essentially a swap. The term is known within the currency and transaction market. In the digital currency segment, it functions alongside tokens. Token SWAP is used mainly in two cases:

  • the blockchain on which a cryptocurrency should function is changed for another one;
  • you finish working on your own blockchain and activate it.

A token SWAP is basically exchanging one type of token for a different one. You can also perform an Atomic SWAP – a fast exchange of one cryptocurrency for another. The premise is the same in both cases.

The future of tokens

Finally, we should consider – what exactly is the future of tokens. They have only recently appeared in the form of digital chips, so it’s hard to examine historical data. However, we can clearly see the large potential of tokens. There’s much more of them than there are cryptocurrencies. That’s mainly due to the fact that they’re so easy to create and that one blockchain can have a large number of tokens. The future of tokens will be largely influenced by legal issues and the ways in which tokens will be regulated in different countries. There is no doubt that even now tokens are becoming the symbol of contemporary business and innovative projects, looking to be financed through digital currency.

Tokens allow you to freely invest in various assets. What’s more, they are easy to generate and put into circulation. Tokens are closely linked to digital currency, but they aren’t synonyms for cryptocurrency. Tokens have a much wider use – which is certainly one of their assets.

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