Many people have heard of cryptocurrencies and blockchain and know that the term “token” is also often mentioned in connection with these concepts. What it is, how it works, and how a token differs from a regular cryptocurrency, we want to consider in our article.
What is a token
In simple terms, a token is a digital certificate that guarantees the obligations of a company to its owner, analogous to shares on the stock exchange in the world of cryptocurrencies.
In the virtual world, a token is a digital conditional unit, the value of which is expressed in some asset. It is synchronized with a database built on blockchain technology, where all tokens are counted. Virtual tokens can be accessed only with an electronic signature and through a corresponding application.
Classification of tokens
Of course, there is no single classification at the moment, but to date tokens can be divided into the following types:
- Security tokens (investment tokens) – created to simplify the work of investors and are essentially shares of a company. They certify the right of ownership and give the opportunity to receive dividends;
- Utility tokens (service tokens) – designed to create virtual currency within a business, company, or any platform. Usually, utility tokens express points received for the fulfillment of company shares, they also include game currencies, etc;
- Asset-backed tokens (commodity tokens) are tokens backed by real-life liquid assets. These can be goods and services, as well as oil and gold. The company issuing commodity tokens is obliged to pay the owner the value of the token or send goods in exchange for tokens.
One of the common mistakes of novice crypto investors is buying tokens without taking into account the fact that a project can issue different types of tokens, both investment and utility tokens. Such variability can complicate an investment decision and eventually even make it unfavorable for the investor.
What can a token be backed by?
The only type of coin that can be backed by real value in currency or any commodity is a commodity token. When it is issued, a company equates the value of some service or commodity to a digital unit. For example, the owner of one commodity token can exchange it for a year’s fitness club membership. The guarantor in this situation is the company that created the personal token. It is she who is responsible for the legal purity of transactions.
Tokenization of assets
Tokenization is the transformation of an asset into a digital unit. Simply put, this process is the transformation of a real-world asset into a digital asset in the form of one conditional unit, the information about which is stored in the blockchain. This transformation allows the token owner to interact with real-world assets much more securely and quickly.
Pros and cons of tokenization
Tokenization has its own advantages:
- Improved and faster trading exchange;
- Secure coin storage and transfers between owners;
- Ability to trade without guarantors or intermediaries, as all transfers are regulated through smart contracts;
- Empowerment of infrastructure and trade exchange in general;
- Significant simplification of work with sellers of goods or services by integrating the system into special mobile applications.
- Increased database security, which is possible due to thorough verification of incoming information;
- High-speed processing of transactions due to a large number of independent servers;
- Creation of secure auditing.
Nevertheless, despite all the above advantages, tokenization can become a problem. There are the following reasons for this:
- There is a risk of loss or theft of user identities due to cyberattacks;
- Ensuring data anonymity in a public blockchain is a nearly impossible task;
- It is difficult to expand the system in decentralized coin operations due to transaction limits.
What is the difference between tokens and cryptocurrency?
As you know, cryptocurrency is managed in a decentralized manner. Simply put, a certain algorithm is responsible for the functioning of coins, which cannot be regulated. Tokens, unlike cryptocurrency, can be both decentralized currency and centralized. In the latter case, a single company, which is its creator, is responsible for managing the coin. In the same organization, all transactions take place, transactions are carried out and all information related to the accounting of coins is processed.
The price of a digital unit may depend on the balance of supply and demand, as well as on the rules of issue and other factors. It is also worth noting the fact that tokens are not backed by a unique blockchain, unlike cryptocurrencies.
Is it worth making your own token?
Whether or not to convert your product into a token can be a serious question for a manufacturer. Whatever the advantages, you should also think about the possible consequences.
But connecting crypto payment acceptance to an online store will definitely help attract progressive customers who are ready to pay for your goods with cryptocurrency. For any questions related to the connection of our cryptoprocessing, you can contact our support!