Tokens
Tokens’ key benefits
The main benefit of a token is that it does not require creating a brand-new blockchain. The startup can focus on developing its platform instead of the technical aspect of a public ledger. And users don't have to use new non-custodial wallets or learn new bevaiours.
Another advantage tokens bring to the crypto world is asset tokenization. They can represent any coins or assets across blockchains, creating a more frictionless market.
How tokens work
Tokens can enable users' interaction with the project’s platform and services. The exact set of token features is defined by the project itself.
For example, the Basic Attention Token (BAT) provides access to different marketing services on the Brave web browser. Users can pay for ads with BAT tokens. The tokens are then distributed among publishers, advertisers, and ad consumers. This way, publishers and advertisers make their earnings without intermediates, while users are compensated for the "attention" they give to the ads displayed online.
Some crypto tokens also embody tradable goods.
They can represent coins, certificates, in-game items, etc. Metaverses built on blockchain typically require using digital items in the form of non-fungible tokens (NFTs). These tokens represent different types of objects in the game: lands, avatars, tools, armor, etc. Often, all these digital objects are purchased with the native metaverse token. For example, for playing blockchain-based metaverse game Alien Worlds, users will need the game’s token, TLM.
Types of tokens
Security tokens
A security token is a digital tokenized form of a traditional security.
Security token holders do not have any ownership rights to the entity which issued the tokens. Instead, they might have some other rights attached to it. The tokens are sold through a public offering called a security token offering (STO). Just like traditional securities, security tokens are regulated by bodies such as the U.S. Securities and Exchange Commission (SEC).
According to the SEC, to determine if a token falls under the security token category, one can perform the "Howey Test," which consists of a series of questions:
- Did you invest money?
- Do you expect profit?
- Did you invest in a common enterprise?
- Are profits dependent on a third party’s effort?
If you answer "yes" to all of these questions, that means you’re dealing with a security token.
Equity tokens
Equity tokens are a subset of security tokens.
They function like traditional stock assets and provide ownership to the token holders. Holders are also entitled to a share of the company’s profits and a right to vote on its major decisions. Equity tokens are issued through an equity token offering (ETO) process.
Utility tokens
Utility tokens provide their holders access to an application or specific services of a blockchain-based project.
Some utility tokens also offer discounts, rewards, or additional benefits to token holders. A genuine utility token usually has no expectation of profit. If that is not the case, it represents a hybrid of a security and utility token. Utility tokens are commonly issued through an initial coin offering (ICO).
Payment tokens
The sole purpose of payment tokens is to pay for goods and services. A token may fall into more than one of the above-listed categories. A security token, for instance, may also have the functionality of a utility token, accounting - once again - for fuzzy boundaries. It remains to be seen how the consensus forms and how the cryptocurrency market evolves in the future.
Others
- Platform Tokens
- Transactional Tokens
- Governance Tokens
Token standards
A token standard is a framework for creating tokens.
A standard defines the smart contract and the features of the token. Different blockchains have their own token standards. Here we will take a look at the common standards for Ethereum-based tokens, as Ethereum is the most commonly used blockchain for launching tokens. Ethereum standards are introduced as Ethereum Requests for Comments (ERC).
ERC-20
ERC-20 is a standard for fungible tokens. Fungible means that all tokens are exactly the same in type and value, and therefore are interchangeable. This standard is usually used for issuing tokens used for voting, payments, staking, etc.
For instance, Chainlink (LINK) is an ERC-20 token built on the Ethereum network. It serves as a currency to pay for Chainlink network operations. Each LINK token is always equal to any other issued LINK token.
- Principal mechanism to create custom money-like tokens on Ethereum
- Specifies a smart contract API that allows balance query and transfer of amounts
- All details (ICO, governance, etc) left to the creator of the contract
- May have own value independent of Ether, traded on several different platforms
ERC-721
ERC-721 is a standard for non-fungible tokens (NFT). These types of tokens are unique and cannot be exchanged for other tokens of the same type. Non-fungible tokens are perfect for creating collectibles, digital art, access keys, or in-game items. Their unique properties allow an NFT to be linked to an image stored on an external server, which makes it possible for a token to have a visual representation.
One example of NFT use case are Zerion Genesis NFTs. A wallet that holds these NFTs does not have to pay fees when using Zerion's trading aggregation.
ERC-1155
The ERC-1155 token standard allows for creating multiple token types: fungible, non-fungible, semi-fungible tokens, or other configurations. Let’s say the goal is to create a game where there will be two types of tokens: one for in-game payments (a fungible token), and another for in-game items (an NFT). With ERC-1155, one smart contract can be created for both tokens, which is more efficient than creating two separate contracts with ERC-20 and ERC-721 standards.
Others
- BSC (BEP-20) variant - Binance Smart Chain (BSC)
- Solana
- Algorand
- Polygon
Coin vs Token
- Coins are native to their blockchains
- Tokens are created on existing blockchains
- The functionalities of coins and tokens often overlap
- Simply put, a token represents what you own, while a coin denotes what you're capable of owning.
Crypto coins vs tokens - Bitstamp Learn Center
Crypto Coin vs. Token: Understanding the Difference
Crypto Coins vs. Tokens: The Difference Explained
Crypto Coin vs Token (Differences + Examples) - YouTube
ICO
- Initial coin offerings (ICOs) are a popular way to raise funds for products and services usually related to cryptocurrency.
- ICOs are similar to initial public offerings (IPOs), but coins issued in an ICO also can have utility for a software service or product.
- A few ICOs have yielded returns for investors. Numerous others have turned out to be fraudulent or have performed poorly.
- To participate in an ICO, you usually need to first purchase a more established digital currency, plus have a basic understanding of cryptocurrency wallets and exchanges.
- ICOs are, for the most part, completely unregulated, so investors must exercise a high degree of caution and diligence when researching and investing in them.
What is an ICO - BIG Risks of an Initial Coin Offering Explained - YouTube