What is a token?

Apr 28, 2024 1:13:57 AM

In cryptocurrencies, a token is used to represent some asset. This asset may or may not be financial. Let’s draw an analogy with a casino: casino chips are tokens representing a specific fiduciary value. Such tokens are freely exchanged within the casino by its users and they can be redeemed for cash at any time.

On a blockchain, we can divide tokens into fungible and non-fungible. In this section, we will talk about fungible tokens. Fungibility is a property that indicates that such a token can be replaced by another of the same kind. An example of a fungible asset is a banknote. A 10-dollar bill can be freely exchanged for another 10-dollar bill. When depositing such a banknote into a bank, the bank need not keep the information of which exact banknote was deposited. The banknote is fungible.

Cryptocurrencies created using smart contracts on top of a blockchain are usually called tokens. Not every token is intended to have intrinsic financial value, although it is generally possible to trade them. We can consider the example of a fan token. An artist can issue tokens in their name, trading them with their fans. Holders of such tokens will be able to participate in polls, such as one that will decide the location of the artist’s next show.

Such fan tokens are not intended to be a store of value but can generally be freely traded. Another example of non-financial tokens is tokens, which are issued by entities such as decentralized autonomous organizations, DAOs for short. Such token holders can participate in voting on actions to be taken or proposed amendments to the contract itself.

In the list of possible uses of tokens, the representation of financial assets is the most common. The USDC token, for example, represents a currency that tries to maintain parity with the dollar. Tokens can also be used to represent coins from one on another network. A wrapped bitcoin, for example, is a token used to represent the ownership of a bitcoin, but it is a token that exists on networks such as Ethereum or Neo.

As we can see, the idea of a token is comprehensive. In principle, anyone can create a token on top of a blockchain that allows writing smart contracts. Since anyone can create a token, care must be taken with its purpose. The beauty of blockchain is its transparency. Tokens are governed by a contract, and anyone who knows the language can read the contract’s code. Therefore, contracts must be written in well-known and simple-to-understand programming languages.