What is a Token: an Essential Element in the Blockchain Universe?

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What is a Token: an Essential Element in the Blockchain Universe?
What is a Token: an Essential Element in the Blockchain Universe?

Tokens are the cornerstone of the entire ecosystem related to blockchain and decentralization. Beyond trading, tokens are, above all, essential for interacting with blockchains, decentralized finance applications or even the metaverse. Discover everything behind the term “token”.

What is a Token?

What are generically called cryptocurrencies are above all tokens or tokens in French. They are digital assets, non-duplicable, created, and exchangeable on blockchains.

For the record, an asset is an item or goods with value. And the latter can be financial, of course, but it can also be a right to vote or property, for example.

Combined with a blockchain that allows their exchange without duplication, tokens have made possible the digitization of value and its transfer in a decentralized digital environment.

Indeed, before the arrival of blockchains, we mainly resonated in terms of computer files. You could have the latest Daft Punk album, which is an asset in the sense that it has value, on your computer and send it to anyone and still keep the original.

Now, what would the Mona Lisa, a gold bar or a Petrus 1982 be worth if we could multiply them as we see fit? Nothing.

This is why the notion of a digital asset that retains its value is considered to have developed with Satoshi Nakamoto’s invention, Bitcoin. And tokens are strategic components of this technological innovation.

What are Tokens Used for?

Once understood that the main advantage of tokens is that they can be exchanged without duplication thanks to the blockchain and that they have value, it is easy to find a whole host of use cases for them.

If everyone thinks of the course of cryptocurrencies, which are tokens with a monetary value, it is possible to “tokenize” almost everything. Whether they are tangible assets or not: real estate, CAC 40 shares, marriage contract or right of access to your favourite golf course, for example.

Once tokenized, all these assets can be transferred, claimed, exchanged, bought or sold without the intervention of a trusted third party other than the blockchain.

What are the Different Categories of Tokens?

There are many types of tokens, each with its own characteristics and functionalities.

Apart from the native tokens directly linked to blockchains, which are also called coins, the other tokens come from smart contracts. Let’s see this in detail:

Native tokens

Often called “coins”, this designation tends to disappear in favour of the term “native tokens”. The main characteristic of a native token is that it is issued by a blockchain and is essential for its operation.

For example, the bitcoin with a lowercase b is the native token of the Bitcoin blockchain, which is designated with a capital B. Transferring bitcoins requires paying fees, also denominated in bitcoins, to the Bitcoin protocol. Then the minors who will register the operation in the blockchain will also be paid in bitcoin.

It is this utility that gives value to the token and allows it to be used as a currency of exchange.

Finally, we can mention the best-known native tokens such as Ether from Ethereum, SOL from Solana or AVAX from the Avalanche blockchain.

Security tokens

The name can be misleading for French speakers. In English, security refers to a claim. Therefore, we will speak of security token during the tokenization of real assets, such as paintings, company shares or real estate.

We can take the example of RealT, which makes it possible to invest in real estate, like an SCI, but with all the advantages of tokenization.

They are not the most widespread tokens because they are backed by real assets; they are considered in many countries as financial assets (equity). They, therefore, fall under the scope of the legislation and are more complex to implement. On the other hand, they are also the least risky since they represent a share of a real asset.

Utility tokens

This is by far the most represented category. These are tokens with a specific utility in a particular ecosystem. It can be a currency to pay for benefits, use a service provided by a decentralized application (Dapp) or obtain voting rights in a decentralized autonomous organization (DAO), among others.

Let’s take a few examples:

  • the CHSB of the SwissBorg platform makes it possible to increase the interest of its cryptocurrencies placed in the Smart Yield;
  • the AAVE token of the eponymous protocol makes it possible to obtain governance rights;
  • BNB pays for trading fees on Binance and brings a plethora of other benefits.

Non-fungible Tokens (NFTs)

If everyone thinks of the different avatars that can reach crazy sums when talking about NFT, it’s actually much more than that.

A Non-Fungible Token, or non-fungible token in French, is a type of token in its own right, the usefulness of which will play a very important role in the future.

As a reminder, an asset is said to be fungible when it is interchangeable because it cannot be distinguished from its peers. For example, bitcoins are fungible, just like £1 coins in a wallet.

Conversely, a non-fungible token is unique and identifiable. They are therefore used in digital art to make a work unique but can find an infinity of other applications such as:

  • copyright protection;
  • Ticketing ;
  • diploma certification;
  • traceability of a product’s supply chain;
  • certificate of authenticity to fight against counterfeiting;
  • intellectual property ;
  • and many others.

How to Get Tokens?

There are many ways to get tokens.

The main one, of course, is to go to cryptocurrency exchange platforms to buy them. If you want to go through one of these sites and don’t know of any, then check out our article on how to buy cryptocurrencies.

It is also possible to obtain it via Initial Coin Offerings (ICO), Initial Dex Offerings (IDO) or Initial Exchange Offerings (IEO). These barbaric names actually refer to fundraising techniques. They allow blockchain startups to sell tokens linked to their project in exchange for other assets that already have value on the market (BNB, AVAX, Ether, etc.) in order to finance their projects.

But buying is not the only solution.

On the one hand, it is possible to obtain them for free thanks to airdrops, or “drops” in French. Free tokens are then offered under certain conditions to those who meet predefined criteria.

On the other hand, you can earn tokens by participating in the maintenance of a network. This can be through transaction validation or other tasks performed, such as sharing its storage space (Sia, Filecoin, etc.).

Finally, regarding the particular category of NFTs, it is either possible to create them yourself (mint) or to buy them on dedicated marketplaces such as OpenSea or Rarible.

Conclusion on Tokens

In summary, we can say that tokens are digital assets that are essential for the operation of blockchains and decentralized applications.

It is thanks to the different types of existing tokens that it is possible to digitally transfer value. This value can be financial or monetary but can also represent monetizable rights.

Therefore, it is the confrontation between supply and demand to acquire the value embedded in the tokens that cause their price to fluctuate.