Tokens are one of the most essential creations of blockchain technology and cryptocurrencies, embodying unique characteristics and opening the door to applications we have yet to discover.
The concept of a token is perhaps one of the concepts most often seen in the literature on cryptocurrencies. This is because these elements explain many facets of the intrinsic nature of cryptocurrencies, while at the same time outlining their enormous possibilities. A simple, approximate definition of what a token is would be:
Tokens are objects similar to coins, but they lack legal tender value. This is because tokens are issued by a private entity for a specific use, and they are usually made from materials of little value.
This tells us two things about tokens: they are created out of a private need, and they have little value. However, the value of tokens can be very high within the community that uses them, where everyone agrees on their use. This is precisely what happens with cryptocurrencies, where tokens such as Bitcoin are widely accepted and represent high value. In fact, the launch and presentation of tokens has become very popular, as they are a fundamental part of Initial Coin Offerings (ICOs).
But beyond that, tokens have the potential to change the world as we know it. Their properties allow us to exploit a range of unimaginable possibilities, hence the importance of understanding every aspect of this little-known concept.
Origin of Tokens
Historically, tokens were chips, pseudo-coins or vouchers used as a substitute for fiat money. They had a certain value within a given ecosystem in which everyone agreed on their use and exchange. Some examples of tokens today are casino chips. Another good example was the coins given to miners in the late 19th and early 20th centuries. This practice was very common in the United States, as it allowed miners to buy goods at the company store.
However, those old tokens were easy to counterfeit and controlled by a single entity that could issue as many as it wanted. This means these early tokens were neither very transparent nor fair. Token technology remained practically unchanged until the arrival of blockchain technology. This is because a token based on blockchain technology inherits some of the characteristics of cryptocurrencies, including traceability, security and the impossibility of counterfeiting.
This opened up the possibility of creating highly secure and reliable tokens, allowing companies and private individuals to generate them for different uses. Today, the creation of cryptographic tokens or blockchain tokens is booming, all thanks to the security and flexibility they provide.
Cryptographic Tokens
One particular feature of these cryptographic tokens is that they are all based on a third party’s blockchain. The first cryptographic tokens were developed on the Bitcoin blockchain and were called Colored Coins, with one of the best-known creation platforms being Counterparty.
But today there are many blockchains that allow tokens to be created. For example, Waves, TRON, NEM, Omni… but without a doubt Ethereum is the platform of choice. This is because it allows developers to build a Smart Contract to create a token quickly and easily. Ethereum is perhaps the most prolific blockchain in terms of the number of tokens built on it. It hosts more than 180,000 different ERC-20 tokens, and more than 1,300 ERC-721 tokens.
This was driven by the creation of the ERC-20 and ERC-721 standards. Both allow tokens to be created quickly on the Ethereum blockchain by associating smart contracts with them.
How Much Do You Know, Cryptonaut?
Can cryptographic tokens exist without the need for a blockchain?
FALSE!
A cryptographic token exists exclusively on a blockchain, since without this technology it would be impossible to meet the necessary properties of security, traceability and transparency.
Types of Cryptographic Tokens
Within the general “token” category, we can find 3 subtypes based on their properties and uses:
- Security Token. These are cryptographic tokens similar to any other known token, but linked to traditional securities and their characteristics.
- Utility Token. Utility tokens are application tokens or user tokens. They provide future access to the products or services offered by a company. Therefore, utility tokens are not created to be an investment.
- Equity Token. Equity tokens are a very special type of token closely related to security tokens. They work like a traditional equity asset. They represent ownership of some third-party asset or company. In addition, their value is tied to the success or failure of that holding.
The three types of tokens mentioned above give those who use them a range of financing tools tailored to their needs. In fact, thanks to this flexibility and their high integration with blockchain technology, some projects choose to launch tokens to raise funds and then migrate them to their own blockchain. This was the case with Ethereum, NEM and TRON.
Of course, you have to be very careful. The ease of launching tokens has also led to the appearance of many tokens with no value whatsoever or whose sole purpose is to scam. Like cryptocurrencies, cryptographic tokens can be listed on exchanges, so their price can rise or fall according to supply and demand, which is naturally influenced by expectations and the actual progress of the project the token is linked to.
