What is a Token?

Cryptographic tokens, or ‘tokens’ for short, are programmable digital units of value that are recorded on a distributed ledger protocol such as a blockchain. Tokens do not have their own blockchain but depend or exist on an existing blockchain. Tokens may represent fungible or infungible units of value in the form of money, coins, points, digital items, or representations of real-world physical items and rights.

Tokens can only be accessed with the private key for the address holding the tokens and can only be authorized via this private key. Therefore, it is widely held that whoever has possession of the private key that can be used to access the tokens is the owner of those tokens. This direct custody becomes useful in cases where tokens are used to represent ownership of physical items that sometimes are subject to fraudulent activity, such as land and mineral rights. But we’ll get more into that in a bit.

Tokens can exist on public, open, permissionless blockchains that anyone on the internet can see or remain private such as within an enterprise business network.

There are four major types of tokens which we will dive more in depth on:

• Payment tokens (aka cryptocurrencies)
• Utility tokens
• Security tokens
• Non-fungible tokens

Most of the top cryptocurrencies are payment tokens, such as Bitcoin, Monero, and Ethereum. They are native assets within their own blockchain that represent units of value can be transferred, often for payments.

Over the last decade tens of thousands of merchants around the world have begun accepting largely established cryptocurrencies for payments. After a merchant accepts the cryptocurrency, they often use third-party custodians or exchanges that convert the asset into legal tender such as USD.

Utility tokens are often used to raise funds in an ICO (Initial Coin Offering) or crowdsale which can be compared to IPO (Initial Public Offering) of companies going public on stock exchange. In case of ICO, the companies go public on blockchain. Later they can be used to purchase a good or service offered by the issuer of the token, hence the ‘utility’ they offer.

Similar to an IPO share, the tokens you buy via ICO (or the secondary market after the offering) can be used to represent  equity in the company or can be your voting rights for decision making. Tokens may also be called coins, cryptocurrency assets or crypto assets and crypto.

The most popular example of utility token is the ERC-20 Ethereum standard. In the cryptocurrency boom of 2017, hundreds of startup cryptocurrency projects issued ERC-20 tokens to investors on the Ethereum blockchain as utility tokens.

These tokens are registered securities within a jurisdiction of issuance, they are literally a ‘tokenized’ securities offering (STOs). Rather than providing utility to the investor, a security token typically represents a share in the company who issued it. Instead of traditional shares in a company, blockchain tokens are minted and issued.

Security tokens are investment contracts that represent legal ownership such as real estate, equity, ETFs, etc. Thus, security tokens are much more heavily regulated by the government than utility tokens and generally offer more investor protection.

A company might choose to issue security tokens over traditional shares because they are more cost-effective, can enable instant settlement and cross-border trading easily, provide easy access to liquidity and can increase transparency.

Non-fungible tokens (NFTs) are unique and can be clearly distinguished from any other token in existence. They are truly one-of-a-kind assets that can represent a digital item, ownership and properties. They can support digital assets, or be backed by physical ones, although these tokens are represented as one whole asset and are not divisible.

For instance, a digital artist may sell a limited amount of digital art to an audience. In the past, if the artist sold only one copy of a digital painting, the purchaser could easily duplicate and sell the digital painting themselves. After all, all digital content can easily be copied, pirated and distributed. With an NFT, anyone can issue tokens that represent a particular real-world or digital thing and can never be modified, changed, duplicated, etc. An NFT could also represent ownership in a particular real estate asset, or represent a unique digital identity.

We’ve simplified the process for creating a token at GoChain. Begin issuing and creating tokens now.