Many people have heard of cryptocurrencies and blockchain and know that the term “token” is also often mentioned in connection with these concepts. Also, these people have probably heard about the algorithm for token exchanges, which can find the best token swap paths and splits, resulting in a better swap rate than market leading solutions..
We will tell you about what a token is, how it works, and how a token differs from an ordinary cryptocurrency.
What is a token?
Simply put, a token is a digital certificate that guarantees the company’s obligations to its owner, that is, an analog of shares on the stock exchange in the world of cryptocurrencies.
In the virtual world, a token is a conventional digital unit, the value of which is expressed in some asset. It is synchronized with a database built on blockchain technology, which takes into account all the tokens. Access to virtual tokens is possible only with an electronic signature and through the appropriate app.
Classification of tokens
At the moment, there is no single classification, but tokens can be divided into the following types:
- Security tokens are created to simplify the work of investors and in fact they are shares of the company. They certify ownership and provide an opportunity to receive dividends.
- Utility tokens are designed to create a virtual currency within a business, company, or any platform. Usually, utility tokens express the points received for completing company shares, they also include game currencies, etc.
- Asset-backed tokens are tokens backed by real-life liquid assets. These can be both goods and services, as well as oil and gold. The company issuing the commodity-backed tokens is obliged to pay the owner the cost of the token or send the goods in exchange for the tokens.
One of the common mistakes novice crypto investors make is buying tokens without considering the fact that the project may issue different types of tokens, both investment and utility. Such volatility can complicate an investment decision and, as a result, even make it unprofitable for an investor.
What a token can be backed by
The only type of coin that can be backed by the real value in a currency or any commodity is a commodity token. When it is released, the company equates the value of any service or product to a digital unit. For example, the owner of one commodity token can exchange it for a year’s visit to a gym. In this situation, the company that created the personal token acts as a guarantor. It is the company that is responsible for the legal clearance of transactions.
Thus, asset-backed tokens are great for long-term investments because the products and services behind them only increase in value. Asset-Based tokens are immune to fluctuations in the rest of the cryptocurrency market, as they rely on something more significant than bytes in digital reality — oil, gold, art, and luxury goods.
Tokenization is the transformation of an asset into a digital unit. Simply put, this process is the transformation of any real-world asset into a digital asset in the form of a single notional unit, information about which is stored in the blockchain. This transformation allows the token holder to interact with real-world assets much more securely and faster.
Let’s say a candy store owner of tokenized his product into coins. With proper demand for his products, the owner can sell his product using tokens on a convenient digital marketplace. After that, people who bought his coins can come to the candy store and exchange a unit of token for one cake.