What is a Cryptocurrency Token: Definition, Types and Tokenization

A token is a separate conditional unit of value that can be obtained, bought and exchanged. A simple example is slot machine tokens. We go to a game room, buy tokens at checkout and use them to start the slot machine. Generally, the more popular the game, the higher its value and the more tokens are required.

A token, in the world of cryptocurrencies and Blockchain, is an entry in the registry. It can be used as a “token” to access the platform’s capabilities or some particular function. For example, the BTC token gives access to the capabilities of the Bitcoin Blockchain (transfer and exchange of BTC), and the ETH token gives access to the Ether Blockchain (transfer and exchange of ETH, as well as the launch of smart contracts).

In other words, cryptocurrency tokens are one of the varieties of money, subway tokens, promotions, or movie tickets.

Difference between Tokens and Coins

Coins are cryptocurrency tokens that are used as a means of payment. Their main features are interchangeability (within one currency) and preservation of value when moving from one user to another.

Coins may differ in the following ways:

• By cryptocurrency. For example, there are Bitcoin (BTC) and Litecoin (LTC) coins, which are like dollars and pounds in the fiat world.

• Based on the pricing principle. If the price of coins is tied to the value of fiat currencies, gold or a barrel of oil, then they are called stablecoins.

• According to the token standard. For example, ERC-20, ERC-223, ERC-721, or NEP-5.

• By nominations. For example, Bitcoin has BTC and Satoshi coins (1 Satoshi ratio = 0.00000001 BTC).

What are Cryptocurrency Tokens?

Equity tokens help to obtain access to the platform’s capabilities without an investment and any link to real assets. Equity tokens are created by mining, premining or staking. Their price is usually determined by the ratio of supply and demand on cryptocurrency exchanges.

Asset-Backed tokens – digital obligations for real services or goods. For example, 100 grams of gold, a kilogram of chocolate, a barrel of oil or 100kW of electricity. Asset-Backed tokens are created after the transfer of the physical assets under the issuing platform control.

Security tokens are digital securities. If tokens pass the Howey test, they are considered securities that must be issued in accordance with The Securities Exchange Act of 1934. Security tokens are created when a project is launched, during an STO, through mining or staking.

Reward tokens – points that users receive for following rules and for particular actions (participation in promotions, contests, loyalty programs). These points can then be exchanged for a product, service or discount. Bonuses, points, and loyalty points are often bought and sold with fiat or other cryptocurrency. You cannot buy or sell a reputation.

Donation tokens – donations and support of people, companies and projects. They do not provide any guarantees of income or the ability to use the Blockchain. With Donation tokens, users simply say “Thank you”.

What is Blockchain Tokenization?

Real estate tokenization scheme by RealIT. Source

Tokenization is a digitalisation of real assets management and accounting. A separate token is a kind of a ownership unit digital certificate.

A simple example: a builder can tokenize his business by creating digital tokens. Each token can be exchanged for one hour of the builder’s work. Such obligations can be put up for auction. If the work is of high quality, the demand for his tokens will grow, which will increase their price. If a builder does a poor job, he will no longer be contacted. This will lead to a decrease in the value of tokens.

Another example: you can tokenize a new building worth $100,000, dividing it into 1000 tokens. Each will cost 100 dollars. These tokens can be put up for auction to attract investment. Anyone with $100 will be able to invest in a new building, simply by purchasing the corresponding token on the exchange. Following construction, the real estate will increase in value and, as a result, the price of tokens will also increase, and they can be sold profitably.

Nowadays, Blockchain is used to tokenize assets, since it:

• Allows you to automate the process using smart contracts.

• Speed up the whole process and make it much easier.

• Increases the security and reliability of data.

• Removes most of the intermediaries.

Conclusion

Cryptocurrency tokens are a collective term for all tokens that are used on cryptocurrency platforms. Depending on the Blockchain, they can act as money (Bitcoin), tokens (gas in Ether), shares (TAAS), gold (OneGram), or any other function that developers want to implement. Therefore, we can expect that this concept will gain popularity and expand.