Tokens, generally speaking, are non-mineable digital units of value that exist as registry entries in blockchains
Tokens come in many different forms – they can be used as currencies for specific ecosystems or encode unique data (see A Guide to Crypto Collectibles and Non-Fungible Tokens
). Additionally, some tokens might be redeemable for off-chain assets (i.e., gold, property, stocks).
Tokens are generally issued by companies using existing third-party blockchains such as the Ethereum
blockchain, as exemplified by the many ERC-20
tokens that were issued and sold through ICOs
in 2017. Strictly speaking, tokens are not cryptocurrencies like Bitcoin
, but transferable units of value issued on top of a blockchain.
There are different token classifications based on the various characteristics of the tokens. The main classification uses functionality to divide tokens into utility tokens and security tokens. Utility tokens generally represent access to a service or can function as a medium of exchange within an ecosystem.
An example of a utility token is BNB
, which acts primarily as a discount token to pay for trading fees on the Binance exchange. Nonetheless, it can also be used to pay for goods and services.
Security tokens, on the other hand, represent financial assets. For instance, a company could issue tokenized shares during an ICO, granting the holder ownership rights and dividends. From a legal standpoint, these would be identical to traditionally-distributed shares.
Another classification assesses features to distinguish between fungible
and non-fungible tokens. If you take a dollar bill and swap it with another dollar bill, you keep the same value. It doesn’t make any difference what unit you hold, as they serve the same purpose. On the flip side, you cannot take a unique piece of art and replace it with a different piece of art.
The same principle holds for tokens. Taking BNB as an example again, it doesn’t matter which specific units you own. They’re interchangeable. Something like a CryptoKitty
, however, has unique properties, and each unit must be treated differently.