If you frequent the world of cryptocurrencies, then you’ve probably heard of tokens. But what are they, and what’s so special about them? Imagine that you need to buy a ticket for the concert of your favorite band or singer.
You do a Google search that sends you to a site where you have to register to proceed with the purchase.
You enter a lot of personal information that will surely be very useful to advertising agencies, and wait for the confirmation email.
Finally you reach the purchase screen, where you have to put in more payment details.
Then you realize that the sales will open in two weeks, and the tickets will probably run out in a few minutes. Just long enough to get to the site, as the servers are sure to be overloaded with people constantly refreshing the page in a desperate attempt to get a seat.
So you wait two weeks, and then you fail to complete the transaction. But don’t worry, there’s bound to be a site where you can buy a seat for three times the original price.
And in case you were able to make the purchase from the original site, the transaction fees will have significantly increased the original price.
Now let’s rework this whole process with the introduction of a token:
You create a crypto wallet in less than a minute and transfer a sum of money in cryptocurrency to it.
Log on to any site that supports the sale of the ticket in the form of a token.
With one click, the site confirms the transaction of a token-ticket and automatically makes payment for the agreed upon price, free of additional fees from any intermediaries.
Due to the unique nature of the token, there is no need to enter personal information: as long as it remains in your wallet, you can use it to go see the concert.
Buying via token has therefore increased security and privacy, while decreasing the expense of purchasing. All within a few minutes. But how does it work?
The technology of tokens
First of all, you need to define what a token is.
A token is the digital representation of an asset on a blockchain, regulated by a smart contract.
Too many specific terms? Let’s go define them.
- The blockchain is the technology behind cryptocurrencies. There are different blockchains, but they share some common characteristics: they are public, immutable, and non-duplicable. Cryptocurrencies and tokens need a blockchain to function and ensure transaction security.
- An asset is any resource or asset, whether physical or digital. Almost anything can be tokenized: money, artwork, discounts at a store, offers, as well as votes, precious metals, and real estate.
- A smart contract is a digital contract embedded within a blockchain, which governs token transactions. A smart contract is immutable and accessible to anyone – so there are no hidden clauses or counterfeits. Once a condition is met – such as paying a sum of money or filling out a form – the smart contract will automatically deliver to you what was agreed upon. And if you have any doubts, you can check the conditions at any time.
Classification of tokens
Tokens are divided into two macro-categories: fungible tokens (FT) and non-fungible tokens (NFT).
Fungible tokens have as their main characteristic equality: fungible tokens are completely identical to each other. Let’s see some examples related to the various types of fungible tokens:
- Utility tokens. They can be used within a given environment (such as a site or marketplace) to buy a good or service, apply a discount or perform a certain action.
- Payment tokens. These are the tokens used exclusively as a form of payment. The most famous fall into the category of stablecoin, or cryptocurrencies with a stable value often linked to a real currency: Tether and USD Coin, for example, are payment tokens that reflect the value of the American dollar.
- Commodity tokens. They are distinguished by a link to a physical resource that functions as collateral for the token. For example, tokens such as PAX Gold and Tether Gold are backed by a gold reserve that helps ensure the stability and security of the token.
Non-fungible tokens, on the other hand, are defined by their uniqueness. In fact, each non-fungible token has meta-data within it, a kind of unique identity card that allows differentiation between tokens. One example is cryptoart, digital works of art that can be bought and sold in the form of tokens. This process ensures the authenticity of the work, as well as the security inherent in tokens.
The benefits of tokenization
Dividing a good or resource into tokens has significant benefits:
- Disintermediation and efficiency: disintermediation increases the profit margin for both buyers and sellers, while efficiency decreases transaction times;
- Transparency: each transaction is recorded and regulated in an irreversible and immutable manner;
- Accessibility: the division into tokens dramatically decreases the capital required for an investment, allowing anyone to access an otherwise privileged market;
- Increased liquidity: highly illiquid assets such as hotels are made liquid by tokens, simplifying and speeding up the buying and selling process.
A final important note concerns the difference between cryptocurrencies and tokens.
A cryptocurrency is a digital currency based on a unique blockchain, on which it bases its security and transactions.
A token represents an asset and is not restricted to a form of payment. Multiple tokens can reside within the same blockchain, and they retain the immutability and non-duplicability inherent in blockchains. Moreover, the transfer of tokens is regulated by smart contracts residing within the same blockchain.
Therefore, it can be said that every token is a cryptocurrency, but not every cryptocurrency is a token.