Cryptocurrencies can refer to the coins and tokens, but these two concepts are a little different. Cryptocurrencies generally have their own unique Blockchain and act as money and are of material value; however, tokens are placed above another Blockchain and indicate a tool or an asset. Therefore, it might be stated that tokens are a more general concept than cryptocurrencies. Tokens need their unique platform and are created in an Initial Coin Offering (ICO). The primary investors are given the token through ICO. These tokens can be used to pay in some applications and systems. Tokens are of different types, and each owns its specific function.
Tokens are not related to the Blockchain era, and they are older. Traditionally the tokens can indicate economic value. For instance, your hand is stamped to enter some concerts; this stamp can indicate a token or a ticket you buy to take an air trip again shows a token. On the one hand, the coin and currency can be accommodated in the category of tokens. So everything which allows you to do specific activities is called token. It is important to know that the token is an idiomatic term. Despite what this term brings to your mind, a token cannot be transferred from one machine to the other, this token points to an asset or the access right which is managed by a network of computers which can be Blockchain or other distributed ledgers. A distributed ledger creates a public and international infrastructure as a series of distributed information. This infrastructure has the related data to the address of the wallets of the tokens.
Digital tokens are a good way to increase the capital, and they have become very much popular these days. Usually the people who are looking for creating cryptocurrencies or their unique platforms start with token offering. These tokens can be assigned in lieu of money (the currency of a country or cryptocurrencies or any other type of money). The investors who have taken these tokens might make a high profit after the project being launched, while there is the risk of losing their capitals too. Of course, the investors are assured that their token will be tradable or useful. These tokens are usually created under Ethereum ER-20 standard. Those who create these tokens should observe some rules set in this standard. Some of these projects are just able to be used with the token they have offered at first after they begin their work. There are two common tokens, including security tokens and utility tokens.
Security tokens are generally investment contracts; that is, having these tokens you probably will partake in the company and its incomes. These tokens have a performance similar to the stock and bonds. If you buy a token which is related to the value and profit of the future of that business, it is highly probable for it to be a security token. Security tokens include specific legal rights; hence, they are controlled under the supervision of the rules of the country, and their legal territory is different. Therefore, in an ICO, you should specify the performance of your token at first to make it clear under which rules it is.
In order to recognize whether your token is a security token or not, ask yourself the following question: does the value of this token increase in time and does this increase depend on the company’s performance? If the answer is yes, your token is in this category.
An example of security tokens is Polymath. It is a network the aim of which is to facilitate the process of creating and selling security tokens. This network transfers billions of dollars of security tokens to the Blockchain network. To put it another way, what Ethereum did with the tokens was the same as what Polymath did with security tokens. This network also has ST20 token standard, which is an additive of ER20 standard and is capable of limiting Blockchain tokens transfer too. This rule is useful since the users get convinced to obey the rules.
Another example of security token is tZero. It is a subsidiary company of Overstock which is active in online retailing. The objective of this platform is to change important global markets which is created due to inefficiency of Wall Street and the investors and those who are in this trade get engaged in traditional structures of the market less. Security tokens of tZero gives its owners’ security stocks, and it is set according to the regulated income of the company.
Utility tokens usually let you gain access to the services specific for a company. These tokens are not considered the investment. Sometimes the boundary between utility tokens and security tokens gets blurred, especially when the rules are variable and no comprehensive global rule has been defined in this regard. But if a utility token is offered correctly and is used as the coupon of the company services, it will be remained a utility token and will not be under the rigid rules of security tokens.
The other example of utility tokens is Dentacoin. It is a DCN token and is used in the global industry of dentistry, and it is, in fact, a payment method. This token was generated by Dentacoin Foundation and is supported by some dentists in Bulgaria, Canada, China, Germany, South Africa, Netherland, and Britain. Besides the ability to receive dentistry services via Dentacoin tokens, the users can earn another income through Dentacoin applications.
Non-fungible Tokens (NFTs)
Two above cases were the common way of using tokens, but NFT has a unique feature. On the contrary to fungible tokens, NFTs cannot be changed. NFT uses ERC721 token standard in Ethereum Blockchain. The most popular form of NFT is a well-known game named Cryptokitties. NFT can be applied in art, real state, ticket sale, etc. Most of the tokens are fungible. For example, when you send someone a Bitcoin and receive a Bitcoin too, there will be no difference in your assets. Fungible tokens usually follow ERC-20 standard. But if you send a non-fungible token to someone and receive another token, you might get uncomfortable of that. Since it is like baseball cards that each card has its own value and information
The Cases of Using Non-Fungible Tokens
One case of using these tokens is for collectors. As it was pointed out in one of the former examples, in Cryptokitties game, every cat has its own features, and it is the same for each one in the Blockchain network. These cats can be traded via Ethereum, and some of them are scarcer than the other. The most expensive cat which is sold in this online game has been priced $120,000.
How Do Tokens Act?
Encrypted tokens show a series of rules which are listed in a smart contract. Each token is related to a Blockchain address. These tokens are accessible through a wallet, and just the one who has the private key of this wallet can use it. The person who has the token can use the authority the token gives them via the private key that these authorities include access right to a specific platform. Or for instance, if this token shows voting, the token owner can vote via his/her private key and creating a digital signature.
As it was explained before, tokens can merely indicate an asset or an access right while some tokens enjoy both these two features. Some cryptocurrencies and the right to mine cryptocurrencies are among these tokens. For example, in mining cryptocurrencies, while you have the access right, an asset (mostly cryptocurrency) will be given to you through mining.
Tokens always require a layer to get assured about their validity. This layer includes a criterion of measuring no-forgery which is placed in the token. Tokens have traditionally and historically been managed by a centrally entity which has been assessing the existence of their validity. Central banks are entitled to make coin and paper moneys that copying and forging them are difficult. This subject is correct about tokens too, and their validity and security is created by a smart contract the token has been made with, and this smart contract is made concomitant with a distributed ledger.
How Can We Trade Tokens?
It is not difficult to buy tokens in the ICO. If you have been interested in a project and want to invest on its future, you can buy the tokens offered by it. Usually, after the tokens get tradable, their prices increase a little. So some users buy token having this strategy to sell their tokens and make a little profit as soon as they are allowed to be traded; however, if you think the future of the project is brilliant and the value of this token will get much greater in the long run, it will be better not to sell it and keep it for now.
[Blockgeeks] “What are Security Tokens?”, Rajarshi Mitra, September, 2018
[Hackernoon] “Ethereum’s ERC-20 Tokens Explained, Simply”, Kenny Li, 17 September, 2018
[Blockchainhub] “Tokens, Cryptocurrencies & other Cryptoassets”, Shermin Voshmgir, May, 2019
[Wikicrypto] “How to Sell Tokens After The ICO To Maximize Profit”, Michael Serrano
[Cointelegraph] “Nonfungible Tokens, Explained”, Connor Blenkinsop, 26 Jul, 2018
[Thenextweb] “The ultimate cryptocurrency explainer: Bitcoin, utility tokens, and stablecoins”, Rebecca Campbell, 13 February, 2019
Dr. Pooyan Ghamari