What are tokens in blockchain technology?

Hi!

Today we are going to talk about tokens. No not the ones that you get in a gaming zone to play all kinds of games. Although, the concept is somewhat the same. We are going to talk about tokens in blockchain technology.

With the rise in blockchain technology and cryptocurrencies, the term has found a new context.

The basic definition of a token is a type of virtual currency that represents a fungible and tradeable asset on the blockchain.

What are tokens on a blockchain?

For context let’s understand what blockchain is on a very basic level. A blockchain is a collection of nodes distributed across a network with each node connected to the next node.

A key feature of a blockchain is that once a node is created on a blockchain it cannot be altered or deleted and any changes in the blockchain will result in the formation of a new node.

Now for the sake of this example, let’s say you want to sell your house using blockchain technology & smart contracts. Since your house is a physical asset you can’t put it on the blockchain directly.

So in order to sell your house, you need to create a representation of your house on the blockchain. These representations are called tokens. You can use these tokens to create a smart contract and sell your house on the blockchain.

Tokens can represent anything from votes to music to as given in the above example your house and are a key part of blockchain technology.

People often get confused between a coin and a token. A coin is a token that serves as a currency and is secured by cryptography while, tokens in general, can be used to represent anything on a blockchain

How do tokens work?

Let’s again take the above example of you wanting to sell your house on a blockchain. In order to do so, you’ll have to create a token on a blockchain.

This token will contain a set of rules created by you in a smart contract and the address of the wallet it belongs to. It can only be accessed with a dedicated wallet and a public-private key pair.

Now, if you want to list your house for sale you’ll have to create a token mentioning the amount you want for the house and create a smart contract.

Then you need to initiate the transfer of the token by signing with your private key which will generate a digital signature on your behalf.

When someone pays you the funds you requested the smart contract will execute the transfer of the token in this case your house to the other person.

Please note that this example was just to explain how tokens work, there are a wide variety of use-cases for a token.

Types of token

In this article, I’ll briefly cover two types of tokens. We are going to cover tokens and how each token works in detail in a future article.

Native tokens

These tokens are directly based on a blockchain platform like Bitcoin, Ethereum, Neo, etc. Native tokens directly represent the underlying software technology called blockchain or distributed ledger technology(DLT).

For example, on the Ethereum network, its native token is called Ether and it has a significant intrinsic value. Ether has a broad range of practical uses, it is used as an operating fee on the network, currency for countless ICO tokens, with new ones hitting the market all the time.

It takes a lot of resources, developers and valuable contributions to building a native token.

Non-native tokens

Non-native tokens have a wide variety of use cases. These tokens are usually issued at Initial coin offering(ICO) by companies whose goal is to raise funds for a project.

With this new age of privatization, a lot of companies want to stay private. So, companies looking to utilize blockchain technology issues tokens to raise funds for their projects. People betting on those companies can buy these tokens.

However, buying these tokens doesn’t mean you getting ownership of these companies and you cannot use these tokens to swap for actual company shares. But, you can trade these tokens on defi platforms as well as you can directly exchange these tokens with companies native tokens, once they are launched.

These tokens also act as a utility token with which you can use a companies products or services. Artists can use these platforms to directly sell their creations to the audience cutting down various middlemen and platforms involved. This way they can earn more while reducing overall cost for the consumer.

Applications of token in blockchain?

Tokens have a wide array of application and new applications are being developed rapidly. Let’s have a look at few applications of tokens:

• Tokens are being used in decentralized apps(Dapps). You can use tokens to access a feature or service in a Dapp.
  For instance, musicoin is a token that lets users play video or stream song on its platform.
• Binance, which is a centralized crypto exchange has its own token called Binance coin(BNB), You can use BNB trade on their platform with 50% less fees.
• As explained above, tokens are also being used to represent a physical entity on the blockchain.
  For e.g. WePower(WPR) is a token that represents electricity. It is a dapp that allows users to buy and sell electricity on the blockchain(Amazing right!!!).
• Tokens are widely used by businesses and startups looking to use blockchain technology to get funds for their projects.
  This is a part of their initial coin offering(ICO). These tokens does not represent the ownership of the company but can be used to use their features and services or as a tradeable asset.