Token
Tue, Apr 15A token is a digital asset that functions on a parent blockchain or on the blockchain of another digital asset, as it does not possess its own blockchain. The term "token" is often used to refer to nearly all cryptocurrencies other than Bitcoin and Ethereum, the two largest cryptocurrencies currently available, despite the existence of many cryptocurrencies that serve as "parent" blockchains.
Tokens serve various purposes and have multiple use cases. Since they are created on a parent blockchain, they automatically inherit features from that parent, such as transaction speed, communication ease, security infrastructure, and interoperability with other tokens on the same parent blockchain.
The advantages of tokens operating on a parent blockchain include being cost-effective to create and develop, ease of use for developers due to established standards, and increased liquidity for tokens. Ethereum is the most commonly used parent blockchain, enabling users to create tokens on it. If the Ethereum blockchain were to vanish today, all tokens created and existing on it would also cease to exist.
ERC-20 tokens, often referred to simply as "ERC-20," are a technical standard used for creating all smart contracts on the Ethereum blockchain. This standard outlines the rules that Ethereum tokens must follow, simplifying the process for developers when creating and developing new projects. It establishes a standard expectation for how tokens will operate within the Ethereum network.
Tokens come in various forms, which are continuously evolving. Some of the primary types of tokens currently in use include:
- Utility tokens – These tokens perform specific actions on a blockchain, providing access to products or services. They are not considered securities and help sustain a platform's economy.
- Governance tokens – Tokens that grant voting power in the decision-making processes that shape a protocol's future.
- Security/equity tokens – Similar to shares from an IPO, these tokens are offered in exchange for investment in early-stage projects and are considered securities, thus subject to additional regulations. They confer ownership rights.
- Payment tokens – Tokens used as a medium of exchange, store of value, or unit of account.
- Asset-backed tokens – Tokens that represent physical assets like real estate, gold, or oil. Ownership of these tokens entitles the holder to the actual physical asset backing the token.
- NFTs – Digital representations of assets, akin to tradable baseball cards or artwork.
- Web3 tokens – Tokens involved in the decentralization of existing Internet infrastructure, such as centralized file storage.
- Exchange tokens – Tokens that are native to and offered by a cryptocurrency exchange, providing added value, such as reduced exchange fees.
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