What is a Token?
Tokens are a common digital asset type in the cryptocurrency market.
To put in simply, tokens can be characterized as a cryptocurrency that usually does not have its own blockchain and is operated thanks to established standards on networks of other cryptocurrencies. It is just another medium of exchange that indicates the value of a transaction. However, whether a token has further use depends on its purpose.
The Merriam Webster dictionary defines utility tokens as “a digital token of cryptocurrency that is issued in order to fund development of the cryptocurrency and that can be later used to purchase a good or service offered by the issuer of the cryptocurrency”. Simply put, utility tokens are a tool to support the funding of various crypto start-ups. This concept is inherently linked to ICOs.
In theory, utility tokens are purchased for reuse as intended (governance, in-game token, etc.). Yet practice most often shows that investors expect a high return on investment in these assets.
Types of tokens
The vast majority of cryptocurrencies that can be found in the CoinMarketCap registry are utility tokens. Examples of such tokens are most commonly all tokens created on the Ethereum blockchain. A very large number of projects issue their tokens based on the ERC-20 standard and then (eventually) migrate to native blockchain solutions during the development of their own platforms. BAT (Basic Attention Token) is a good example of projects using utility tokens. This token is the core of the community creator support system and is also a vital mechanism of the Brave browser.
A special variant of utility tokens may be tokens issued by exchanges. Although exchange tokens have their own qualifications, they are the most common ones that offer certain services within trading platforms. Examples of such tokens are the Binance Coin and KuCoin Token. These tokens are used as part of the commercial functions of the exchange – rewards, commissions, etc.
Let us summarize the features of tokens. It is precisely their features that distinguish them to a large extent from cryptocurrencies strictly intended for payments, such as bitcoin.
Utility tokens primarily give the holder the right to use a product or service of a particular platform. Governance tokens are used to manage and enable voting within the DAO community. Game (in-game) tokens are primarily used as a means of payment within the tokenomics of games and metaverses. A token is also a medium of exchange of value for services offered, and thus can be a decentralized way of storing value.
Sources: coinmarketcap.com, coindesk.com, wiki, pixabay.com, oKrypte.sk