Tokens – what are they? Features, difference from cryptocurrency, varieties, advantages and disadvantages
The digital, economically oriented industry, following the progressive dynamics of popularization and development of blockchain technologies, has attracted the interest of a colossal audience of Internet users. In light of this trend, specific terms have become widespread – “altcoin“, “cryptocurrency” and “token”.
The first two concepts are quite correct, correctly used and accurately interpreted by the majority of users interested in virtual money, however, the situation is different with tokens. On the Internet, due to the popularity of cryptocurrency topics, incompetent authors constantly use the word “token” in any materials where blockchain projects or the digital coin market are somehow affected. This gives rise to the formation of a wrong perception by people of the nuances of such an interesting and profitable area. This leads to numerous mistakes, financial failures, and negative perceptions about cryptocurrencies.
Let’s thoroughly analyze the most important aspects of the topic of tokens in the course of a detailed consideration of their features, existing options, positive and negative qualities.
Token – what is it?
Any subject-oriented material providing information about virtual currencies, blockchain or modern crypto-investing often contains the term “token”. Today its relevance and popularity is high. However, many people mistakenly perceive its true meaning, which manifests itself in two versions.
In a key sense, a digital token is a specialized accounting unit used to display the balance of cryptoassets, that is, bitcoins or some kind of alcoins. Simply put, any cryptocurrency with which a speculator and investor wants to work is calculated in tokens.
Nuance! Information about accounted tokens (available coins) is located in the base code of the blockchain, accessible from the used cryptocurrency wallet. You need a virtual money storage with an electronic signature system!
Another area of active use of the term “token” refers to the release of new altcoins, or rather to the ICO procedure. Here, tokens denote coins that exist within the framework of a blockchain project, for the full completion of which an ICO is being held. The organizers announce the initial release of coins that are not yet cryptocurrency. These are tokens. Investors buy up the amount of assets set by the developers and in this way give the missing funds. After the official presentation of the launch of the blockchain project, tokens are accepted into the general rating of the cryptocurrency market and become full-fledged altcoins. Now, such coins cannot be called tokens, since they are already becoming full-fledged cryptocurrencies.
Only these options are perfectly competent options for using the concept of “token”.
Differences between tokens and cryptocurrencies
In the field of cryptographic assets, tokens are characterized by broader functionality and specific characteristics.
- When the blockchain system is not launched by the developers, its internal coins are called tokens. They do not possess many of the characteristics inherent in full-fledged participants in the cryptocurrency market.
- In addition to decentralized issuance (like cryptocurrencies), tokens can be issued centrally, under the control of a specific organization. Usually, each transaction with such a “branded” token is processed exclusively by the servers of one company. Generation of blocks for cryptocurrency blockchains, at the same time, is implemented only by the computing power of all interested users of the system – miners.
- The cost of tokens is determined not only by the degree of supply and demand, as with conventional cryptocurrencies. The price is additionally formed by other factors, for example, the nuances of the payment or issue of tokens determined by the issuing company, the link to a valuable asset (shares, vouchers), etc.
- Lack of your own unique blockchain. Therefore, until the official start of the system, such coins cannot be mined.
- Tokens are, in fact, a close analogue of company stocks. A person who purchases a certain amount of tokens invests in a blockchain project under development. Its creators envision a quick transformation of the idea into a demanded system. The token holder receives a percentage of the investments made for a specified time. Cryptocurrency, on the other hand, is a purely virtual instrument for fast, comfortable, anonymous value transfer used by users on the Internet.
There are still about 4-5 distinctive characteristics of tokens, but these aspects are enough to realize that this asset and cryptocurrency are not identical.
Key features of tokens
In order to invest in promising tokens or otherwise work with this asset, you should disassemble the significant features.
- The first tokens appeared only at the beginning of the emergence of ICO blockchain projects. The platform of the Ethereum system played a significant role in this phenomenon, whose smart contracts contributed to the rapid progression and popularization of tokens.
- Similar to cryptocurrencies, each token is built on blockchain technology. All such coins comply with the ERC 20 standard, which defines the structure of the source code.
- Tokens belong to the category of intangible assets. When an investor starts buying them, he becomes the owner of purely virtual value that has no physical equivalent. He will only have private keys containing information about the number of tokens received.
Explanation! Every virtual currency is essentially a void. Its price is built only by current popularity, excitement, imposed advertising, public opinion and the expectation of some kind of miracle. Any real currency used by countries can always be exchanged for a set amount of a valuable equivalent – gold, oil, platinum, etc. Cryptographic money is not backed by a physical analogue. For example, today the holder will receive $ 6447.45 for bitcoin, and tomorrow, under specific circumstances, he will not receive even 2-3 cents. The lightning-fast implementation of such a scenario is actually unrealistic, but possible!
4. Creating new blockchain projects for ICO, developers today use the Ethereum platform in 73-81.7%. This network is quite wide and very popular, which practically guarantees a certain demand for the token already at the start. Other popular networks are Waves, EOS, KickICO, and NEM.
5. Investing in tokens and a potentially large profit from it does not imply the involvement of large capital. There are frequent episodes of completely free provision of a small amount of tokens to users to advertise and popularize the project being developed. In principle, many literate users are now steadily making money mainly on cryptocurrency bounty and airdrop.
Specialists dealing with cryptocurrency issues distinguish 3 large groups of tokens:
✅ equity tokens. Assets that are completely analogous to the classic shares of companies, but exist in virtual form. These are practically securities, speculation with which is conducted by traders on stock exchanges. The investor buys equity token and receives dividends on a regular basis.
✅ utility tokens. The use of such tokens is limited to the work of a specific project or web site. Often these tools are presented as bonus coins, accumulative points, prize tokens, game currency, etc. It is impossible to withdraw such money from a specific system, but users are allowed to change them for any preferences, resource services – there are many options.
✅ asset-based tokens. This type of token is unique because it has a secured value in the form of a specific service or individual product. This asset is also called a liability token. A user receives these coins for fiat currency, and then spends on a real equivalent, for example, a trip to the cinema, online PC optimization, etc. The conversion of asset-based tokens is fully controlled and guaranteed by the company providing the specified set of goods or services.
Pros of tokens
Using different variants of tokens can bring convenience, benefit and material income. It is advisable to highlight the following positive qualities:
✅ You can create and launch your own blockchain project with specific tokens within any business, from a small store to a large corporation. Such a maneuver is able to bring obvious potential in the subsequent development of the company.
✅ Tokens significantly optimize and speed up trading processes due to the convenience of working with virtual currencies. There is no additional congestion associated with accepting and processing fiat money.
✅ The ability to get rid of business from intermediaries. At the stage of smart contracts, it is not difficult to register their participation.
✅ The use of tokens multiplies the basic functionality of the platform, expanding its potential. For example, new modules can be included in the system – automation of recurring payments, multilevel authentication, linking with recharge cards, creating invoices, etc.
✅ Tokens allow you to streamline the use of the service. This significantly improves the usability of mobile applications. Due to additional opportunities, new users are attracted who prefer to order and buy something using a smartphone or tablet.
If you create a platform with tokens using blockchain technologies, then enviable advantages are added:
- It turns out virtually unlimited in volume, protected database.
- Reliable auditing thanks to thorough checking of the transaction history.
- Stable high-speed order processing by different servers.
All innovations are characterized by a number of negative aspects and difficulties in integrating them into the system. This logic is relevant for tokens. Factors to be taken into account:
✅ The scaling task is made more difficult when using tokens. The particular complexity here is typical for the bases formed on the blockchain.
✅ There is a risk of users losing their private keys or the risk of their being stolen by hackers.
✅ The difficulty of securing privacy for a public blockchain. This is determined by the need for open storage of data in order to verify token transactions.
A token is a multivalued concept capable of representing an intrasystem payment unit, electronic share, or investment instrument. Everything is determined by the context of the use of this term.
It is important for users interested in cryptocurrencies to understand the features of tokens in order to avoid confusion in the modern abundance of assorted information. If you thoroughly analyze and understand the nuances, pros and cons of tokens, then promising options for using these assets will open. Thanks to them, you can improve your business, optimize the capabilities of web projects, and implement a little-known but promising idea of making money online.