What are tokens and what is their role in the blockchain system

What are tokens and what is their role in the blockchain system

Many people have heard of cryptocurrencies and blockchain and know that the term “token” is also often mentioned in conjunction with these concepts. What it is, how it works, and how a token differs from an ordinary cryptocurrency, we want to look at in our article.

What is a token?

In simple terms, a token is a digital certificate that guarantees a company’s obligations to its owner, analogous to a stock on a stock exchange in the world of cryptocurrencies.

In the virtual world, a token is a digital unit whose value is expressed in an asset. It is synchronized with a database built on blockchain technology, where all tokens are counted. Virtual tokens can only be accessed with an electronic signature and through the appropriate application.

Classification of tokens

Of course, there is no single classification at the moment, but tokens can currently be divided into the following types:

  • Security tokens (investment tokens) – created to facilitate investors and are essentially shares in a company. They certify ownership and give the opportunity to receive dividends.
  • Utility tokens (service tokens) – are designed to create a virtual currency within a business, company or platform. Usually, utility tokens express the points received for the execution of the companies shares, also they include game currencies, etc.
  • Asset-backed tokens are tokens backed by real-life liquid assets. These can be commodities and services, as well as oil and gold. The company issuing the commodity tokens must pay the owner the value of the token or send the goods in exchange for the tokens.

One of the common mistakes of novice crypto-investors is buying tokens without taking into account the fact that a project can issue different types of tokens, both investment and service ones. This variability can complicate an investment decision and ultimately even make it unprofitable for the investor.

What can a token be backed by?

The only kind of coin that can be backed by a real value in currency or some commodity is a commodity token. When it is issued, the company equates the value of some service or commodity to a digital unit. So, for example, the owner of one commodity token can exchange it for a year’s subscription to a fitness club. The guarantor in this situation is the company that created the personal token. It is the company that is responsible for the legal clearance of the transactions.

Thus, asset-backed tokens are great for long-term investing, as the products and services behind them only grow in value. Asset-backed tokens are immune to fluctuations in the rest of the cryptocurrency market, as they rely on something more weighty than bytes in digital reality – oil, gold, art and luxury goods.

Tokenization of assets

Tokenization is the transformation of an asset into a digital unit. Simply put, this process is the transformation of a real-world asset into a digital asset in the form of a single notional unit whose information is stored in a blockchain. This transformation allows the token holder to interact with real-world assets much more securely and quickly.

To give an example, the owner of a cheese shop tokenized his product into coins. With proper demand for his cheese, the owner can sell his product with tokens on a digital marketplace he is comfortable with. After that, people who bought his coins can come to the cheese shop and exchange a unit of token for one block of cheese.

Pros and cons of tokenization

Tokenization has its advantages:

  • Improved and faster trade exchange;
  • Secure coin storage and transfers between owners;
  • The ability to trade without guarantors or intermediaries, as all transfers are regulated through smart contracts;
  • Enhanced infrastructure and trade exchange capabilities in general;
  • Significant simplification of work with sellers of goods or services by integrating the system into special mobile applications;
  • Increased security of the database, which is possible due to the careful verification of incoming information;
  • High-speed transaction processing due to a large number of independent servers;
  • Creation of a secure audit.

Nevertheless, despite all the listed advantages, tokenization can be a problem. There are the following reasons for this:

  • There is a risk of users’ personal rights being lost or stolen due to cyberattacks;
  • Ensuring data anonymity in a public blockchain is almost an impossible task;
  • The difficulty of expanding the system when dealing with coins in a decentralized way because of the limits on the number of transactions.

What is the difference between tokens and cryptocurrency?

As we know, cryptocurrency is managed in a decentralized manner. Simply put, a certain algorithm is responsible for the functioning of coins, which cannot be regulated. Tokens, in contrast to cryptocurrency, can be a decentralized currency or a centralized one. In the latter case, a single company is responsible for managing the coin, which is its creator. The same organization conducts all transactions, carries out transactions and processes all information related to the accounting of coins.

The price of a digital token can depend on the balance of supply and demand, as well as the rules of issuance and other factors. It is also worth noting that tokens are not backed by a unique blockchain, unlike cryptocurrencies.

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How do I purchase and store tokens?

Company assets 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. Acquiring tokens is very similar to the process of acquiring and trading cryptocurrencies, and is very often available through our familiar electronic wallets.

The storage of such coins is also no different from the storage of cryptocurrencies. Typically, the creator of the token releases its own wallet app, where you can store your virtual asset. Of course, this separate app is part of a single tokenization platform. Just like storing cryptocurrencies, token storage has its own security rules.

Is it worth making your own token?

Whether or not to convert your product to a token can be a serious question for a vendor. Whatever the benefits, it’s also worth thinking about the possible consequences.

But connecting cryptopayment acceptance to your online store will definitely help attract progressive customers who are willing to pay for your product with cryptocurrency.

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