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What is a token? 2 types to know
Written by Davies on / Reading time: 4 minutes.
Originally, the tokens were vouchers or pseudo coins that were used to replace the actual currency. Did you know that casino chips are also tokens? Used to replace real money - physically-, are accepted within that place to which they are made, and it is only valid while you're there.
A token is a unit of value. It is issued by Fintech ventures or by those associated with the use of a blockchain to represent an active or have a particular utility. It is also accepted by a community and not only as a mean of payment, they have more applications because you can represent any negotiable and fungible asset. Tokens are created on the protocol of a cryptocurrency that already exists in a certain blockchain.
Many centuries ago, tokens emerged to supplement the shortage of the official currency. The most common was to coin them in order to exchange them for real coins. However, many times it was not possible, and the value of the tokens was limited to a specific area, as it is the case with the chips of casinos.
Types of tokens to know
Bitcoin Wiki distinguishes two types of tokens:
- Utility tokens: They are those that allow owners to have access to various services that a platform offers based on a blockchain. They are characterized, in theory, not created as investments. Therefore, if they are well structured, they may be exempt from the laws on valuable goods of each of the countries. And if you wonder what their function is, its function is to stimulate the microeconomics of a blockchain ecosystem. In this way, it facilitates the financing of projects. BAT —Basic Attention Token— is an example of a token of this type. Something that we should have very clear is that a useful token does not give you shares in the company or their earnings.
- Security tokens: According to Bitcoin Wiki they are "those that give its owner the right to claim their investment interests. It may be the right to participate: in a legal entity, to provide capital, profit, be a creditor or lender entity, etc.” Often, this type of token represents a right to an underlying asset, as a set of real properties, cash flow or shares in another fund. The most popular are what are known as OTP, One-Time Password.
Token vs Coin: How do they differ?
- Both operate on the blockchain network: they do it differently, but they use this technology and offer the security benefits it has. Its purpose is the same: decentralized options and safer operations for investors.
- Both are units of value: both, even if it is complex to understand. The value of the token or coin depends on the work each of them does within its own blockchain. However, that value is not always going to be the same, because, for example, the values of the tokens are fluctuating and that is precisely what gives them value.
- Both operate in a decentralized manner: it is their raison d'ealist. Another: to empower users involved in transactions, as they safeguard the security of their digital assets; those who control the way those assets operate and are exchanged. Moreover, another fundamental thing is that intermediaries disappear. This means that no third party is needed to complete the corresponding financial transaction.
- A coin in an alternative currency with a separate blockchain: it is the main difference that exists between these two virtual assets. With this, the coin has greater independence and can operate with various values, depending on the unit that has been set for its blockchain.
- A token can be considered as a fluctuating unit of change: it can have a certain value in the morning and a different one in the afternoon or evening. Why? Because according to market demand and buy and sell offers, tokens change and take on a different value.
- Tokens have value, although it is not their own, but they take it according to the market: this means that the value of the token is not depending entirely on it, but on the cryptocurrency on which it has been "built".