Token

What is A Token?

A token in blockchain and cryptocurrency refers to an electronic asset of value, utility, or ownership in a specific blockchain network.

Tokens differ from cryptocurrencies such as Bitcoin or Ethereum (which essentially serve as digital money) because tokens can have purposes other than simply being money, such as governance, access to services, representing security, or being a medium of exchange for decentralized applications (dApps).

Types of Tokens by Purpose

Tokens can be divided into several types based on their use case and technology:

1. Utility Tokens

Utility tokens grant the holder access to a specific feature or service on a blockchain platform. They are not an investment, but rather a way to use the platform. Examples include Basic Attention Token (BAT) for web advertising and Chainlink (LINK) for decentralized oracles.

2. Security Tokens

Security tokens are proof of ownership of an asset, such as company shares, real estate, or other securities. Security tokens are governed by regimes similar to traditional securities and typically entitle holders to dividends, voting rights, or a share of profits. Some examples include tZERO and Polymath.

3. Governance Tokens

Governance tokens give holders the right to vote on a blockchain protocol or decentralized autonomous organization (DAO) on governance issues. Token holders can vote on proposals, protocol changes, and governance guidelines. Examples include Uniswap (UNI) and Aave (AAVE).

4. Stablecoins

Stablecoins are cryptocurrencies that stabilize their price by being backed by an external asset, such as fiat currency (e.g. USD, EUR) or commodities. They stabilize the cryptocurrency market and are widely used for transactions and savings. The most well-known stablecoins include USDT (Tether), USDC (USD Coin), and DAI.

5. Non-Fungible Tokens (NFTs)

NFTs are unique digital assets that represent ownership of individual items, such as art, music, videos, virtual real estate, or collectibles. NFTs cannot be divided and are unique (there is only one copy), unlike fungible tokens, which have an identical one-to-one exchange rate. Examples include CryptoPunks, Bored Ape Yacht Club, and Axie Infinity NFTs.

6. Reward Tokens

Reward tokens are paid to participants for interacting with blockchain networks, such as staking, providing liquidity, or participating in the community. LPT (Livepeer) and CAKE (PancakeSwap) are a few examples.

Where Tokens are Issued

Tokens are issued on top of established blockchain networks and are mostly created using smart contracts. The most common Ethereum standards are ERC-20 and ERC-721, which are for fungible and non-fungible tokens respectively. There are other networks such as Binance Smart Chain (BSC), Solana, and Polkadot that also use token standards such as BEP-20 (BSC) and SPL (Solana).

Practical Use Cases of Tokens

Tokens have various uses in blockchain communities:

• Payments: Some tokens serve as a medium of exchange on the platform.
• Staking: Tokens which placed in staking, are frozen to secure the network and earn rewards.
• Decentralized Finance (DeFi): Tokens are used for lending, borrowing, farming, and providing liquidity.
• Access and Membership: Some tokens provide special access to content, services, or votes.
• Representation of Real-World Assets: Security tokens tokenize underlying real-world assets like stocks and real estate.

Tokens: Summary

Tokens are a critical core component of the blockchain system, enabling an incredibly diverse range of applications spanning finance and governance, as well as gaming and digital identity.

As technology continues to evolve alongside fundamental policy, tokens will remain an important factor in shaping the future of decentralized economics and digital ownership.

Also see: What is Tokenomics?