A Token is a digital asset that operates on a parent blockchain or on another digital asset’s blockchain because it doesn’t have a blockchain of its own.
The term “token” also often describes almost all other cryptocurrencies other than Bitcoin and Ethereum, the two largest cryptocurrencies in existence today, even though many cryptocurrencies exist that are the “parent” blockchains.
Tokens have multiple purposes and use cases.
Tokens, because they’re created on a parent blockchain, automatically inherit characteristics of that parent, such as transaction speed, ease of communication, security infrastructure, and interoperability with other tokens operating on the same parent blockchain.
The benefits for tokens operating on a parent blockchain include
- being cost-effective to create and develop
- ease of use for developers since standards are already in place
- increased token liquidity
Ethereum is the most widely used parent blockchain, allowing users to create tokens on top of it.
If the Ethereum blockchain disappeared today, as the underlying platform, all of the tokens created and existing on top of it would also disappear.
ERC-20 tokens, also known simply as “ERC-20”, are a technical standard that is used to create all smart contracts on the Ethereum blockchain.
It outlines all of the rules that Ethereum tokens must adhere to, and it simplifies what developers have to do when trying to create and develop new projects.
It creates a standard expectation of how tokens will function within the Ethereum network.
Tokens come in various forms, which are evolving as we speak. But some of the primary tokens being used right now include
- Utility tokens – these tokens perform some action on a specific blockchain. They can provide access to a product or service. Not considered securities. Help to sustain a platform’s economy.
- Governance tokens – tokens that provide voting power in the decision-making process that governs a protocol’s future.
- Security/equity tokens – similar to shares received from an IPO, ICOs offered tokens in exchange for investment in an early-stage project, they’re considered securities, so they come with additional regulation. They give rights to ownership.
- Payment tokens – tokens used as a medium of exchange, store of value, or unit of account.
- Asset-backed tokens -tokens that represent physical assets, such as real estate or gold, or oil. Ownership of these tokens gives you claim to the actual physical asset backing the token.
- NFTs – digital representations of some asset, much like tradeable baseball cards or artwork.
- Web3 tokens – tokens involved in decentralizing existing Internet infrastructure, like centralized file storage.
- Exchange tokens – tokens native to and offered by a crypto exchange that provides some value-add for using them, such as reducing exchange fees.