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Edem Agbenyo
Edem Agbenyo

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Understanding Crypto tokens

Tokens are not a new thing, they have existed since the first thought of exchanging goods. Early form of tokens were probably beads and shells. We also have casino chips, vouchers, gift cards, bonus points, stocks certificates, bonds, concert-entry tokens, dinner-reservation, ID cards, club memberships, or train /airline tickets. Paper money or coins are also other forms of tokens. There is an anti-counterfeiting measure in-built in most tokens in order to prevent people from easily replicating a token and thereby cheating the system. Tokens are used in computers too, an example will be a web browser sending a token to a website to authenticate a user, hence they are used to perform operation or manage access rights.

In order for a token to be trusted, it must be issued and manage by a central authority that ensure their validity and control the security of each token . Security features built into the tokens help protect against a comprehensive range of counterfeit methods and attempts to use a token more than once. A cryptographic token validity and security is managed by the smart contract that created it and the underlying distributed ledger on which it runs.

Cryptographic Tokens

A token is simply a digital asset. A token in itself is an object of value, or representation of any other asset on a digital ledger.
It can represent access rights to a public or private property or service. Tokens can represent a special type of rules built into a smart contract, called token contract. Token contract maps addresses to their respective balance in a blockchain. Tokens are accessed in a blockchain using a wallet software which communicates with the network and manages the public-private key that relates to the blockchain address.

Types of Tokens

Tokens can be classified under 4 different types:

  • Payment tokens
    These are tokens that serve a medium of exchange, store of value and unit of account in a distributed ledger. They are also known as coins. Common examples of payment are Bitcoin, Dogecoin, Litecoin. The value of these coins rises or falls based on the demand and supply at any point in time.

  • Utility tokens
    These tokens give the holders access and the right to perform some action only in a specific networks. They are unique to their ecosystem and can't be used in other networks. An example is the Ether that is used to access DApps on the Ethereum blockchain.

  • Security tokens
    Security tokens are simple securities that have been tokenised. A security is a traditional asset like Stocks or shares that is tradable. These tokens are traded on a blockchain network where ownership rights are stored and the value of the off-chain asset they represent are tied to them.

  • Non-fungible tokens
    These are tokens that are unique in nature as they represent distinct and scarce assets such as arts or real estate. NFTs can also be used to represent identities and certificates(licenses, degrees, voting rights, etc..). NFTs relies on the ERC-721 Standard as it allows for more data to be added to a token such as metadata about the asset and ownership information

Benefits of tokens

The advents of cryptocurrency tokens is one of the best innovation to have happened in recent times. Some of the major benefits its usage provide are:

  • It is a universal means of payment with no central entity controlling or supervising transactions
  • Tokens provide more transparency along marketplaces than existing financial systems currently offer.
  • It helps reduce the cost of managing and trading cryptographic assets using a distributed ledger.

Book: Token Economy by Shermin Voshmgir

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