Both in cryptocurrency and in general, the word “token” has various meanings. Broadly speaking, a token is a digital asset and a so-called supply for something else. With such way of functioning, tokens are used in cryptocurrency in different ways.
This term is used to describe a unit of value, that represents it but isn’t an inherent value itself. As for the cryptocurrencies, tokens serve to create, transfer and store coins, being a type of encryption. Tokens take part in all transactions and operations made by users of specific platforms. They are transferred through the network when money transactions are made and exist as entries on specific coin’s blockchain or ledger.
Sometimes, tokens are assets created on the basis of other platforms. For example, let’s take Ethereum. Ether (ETH) is an original token of Ethereum, while KIN coin is an ERC-20 token created on the Ethereum’s basis. Both ETH and KIN are tokens, but ETH is a native one. In most cases, native tokens have a higher value on the platform than all the others. So, sometimes a word “token” is used to differentiate it from currencies that don’t have their native network or platform (like KIN).
At the same time, a term “token” refers to an encrypted string of information. So generally, it means all those important things in cryptocurrency and has different meanings, depending on the context. In some networks they act as transaction mechanisms, sometimes they represent coins, in other situations they act like stock. In some cases, tokens bring unique functions that cannot be incorporated without them, just like casino chips in poker.
BTC is the first coin and token in the history of cryptocurrency, which serves different aims, most of which are financial. However, most experts say that Bitcoin only has some token elements, while it is not initially tailored to be a tokenized asset. With time, specialized blockchains were created to support tokens, like Ethereum, Waves, NEO, NXT, and Universa.
As a rule, tokens have limitations in terms of supplement and their value may significantly depend on this factor (but it is not always like that). In case of Ether tokens, they are not limited in number and can be mined forever.
So, cryptocurrency tokens are special digital coins that pertain on their blockchains and stand for the valuable assets. For instance, you may receive one token that stands for X sum of points you get for doing something useful for the network/blockchain as a customer. Most platforms provide users with small amounts of their native tokens just for being connected to the network. The reason is that a connection uses your machine’s resources such as memory to support the entire network and allow its correct functioning. When you get tokens for your useful actions, you may get something from the network in turn. For example, if you are an Ethereum network member, you may use your tokens to get an access to the content shared there. As you know, Ethereum has two types of content – free and paid, so your tokens can act as money to pay for the latter one. Another token may represent a crypto coin, like 1 token = 10 LTC on a particular blockchain. These tokens can be traded among the members of the blockchain.
The revolutionary potential of tokens
Ether is a token needed to launch and use other tokens in the blockchain. Therefore, ETH is the most expensive token in its own network. In most cases, the price is determined by demand and purpose. In theory, despite the fact that every technically skilled person can create his own token, but only useful, well-done, and intentioned tokens obtain high value.
Today, tokens are used for a lot of purposes, despite the fact that they are criticized. Some experts say that tokenization leads to failures and flops and many services don’t need them. However, we believe that most blockchain companies do benefit from the tokenized economy.
There are two main problems faced by tokenization today: frequency band and storage. Every element of a computer system, be it a letter or another symbol, needs space. Most blockchains store data in a decentralized way, but considering the fact that a number of members continue to grow, a limitless storage is necessary.
Today, these limitations inspired new developers to create more blockchains. Taking the desired results into account, developers choose the most suitable types of blockchain and improve this technology to meet the goals. The most stable token-based network today is Ethereum and therefore more and more creators choose it as a basis, however, there are no reasons to think that a situation will always be this way.
Tokenization as a basis for everything
Tokens can be used in various types of online services, from subscriptions to peer-to-peer exchanges. Here are some central issues easily solved by blockchain and tokens:
Decentralization allows every person in the world have an access to the token-based economies. This increases the limits of the possible impact tokens can bring to the society.
Tokens ensure their own security and don’t need any external regulation, therefore law and governmental institutions cannot have ascendency over them.
- Usability + self-sufficiency
Average users with medium technical skills can easily grasp the principles of tokens’ work. Also, this way token-based network can provide its own existence by attracting more people and receiving more income for system operations, charging minimal fees for transactions. Moreover, as we have already said, connected and active users help networks function properly.
- Speed and cost
All types of tokens are designed to facilitate a high number of transactions within a short period of time. For instance, such serious online mechanisms as the Internet-of-Things require millions of computers to process the information about all the transactions. None of the existing payment services, including such giants as Visa and PayPal, can’t handle this. However, the token-based economy has all chances to cope with such volumes.
So, as you can see, token doesn’t have one concrete definition. It refers to many functions and things at once. Thus, in most cases, tokens don’t have their own value but stand for something else.
Tokens are encrypted and they serve to point to the information or value without containing it. As for the cryptocurrency, tokens are created when people do transactions. In general, coins can be called tokens and there is no essential difference between them. It means that ETH is a native token in the Ethereum network and BTC is a native token in the Bitcoin network. Blockchain transactions are all tokenized.