Blockchain technology relies heavily on tokens to work. It could even be described as a tokenized technology that removes the friction between third parties and barriers within the system. As bitcoin technology, cryptocurrencies, NFTs, and Web 3 in general experience widespread adoption and start taking on a more central role in the world, tokens have become the most important innovations of the 21st century. They play a central role in all of these technologies mentioned above. In cryptocurrencies, crypto tokens are used primarily to represent currencies.
In NFTs, the use of tokens is varied and is integral to the use of NFTs in different industries. In the metaverse, the use of tokens is tied to NFTs and is used to provide access to metaverses, metaverse features, and events.
So, what are tokens?
What are Tokens?
A token is an asset that represents a particular value. Tokens are not new. In traditional finance, they are used to authenticate transactions. They are also used to represent value often economic in nature. Examples include casino tokens and stock certificates. Tokens are designed to be unique to prevent any fallouts within the system while providing maximum security.
The use of tokens in cryptocurrencies is simply a new re-imagined way of using tokens, this time digitally. In cryptocurrencies, the use of tokens varies greatly but at their core, they are used to represent digital currencies and assets.
What is a Smart Token?
A smart token is a regular token that has additional importance usually containing an in-built program that allows for the manipulation of the value of the asset. What makes smart tokens different from regular tokens is that smart tokens have the information required to complete a transaction in addition to the value they represent.
Smart tokens can do this because they are designed to carry smart contracts that carry three layers of information that are required to authorize transitions.
- The asset or origin of value which could be a crypto wallet
- A set of rules put in place by the issuer of the token that clearly defines who will have access to the token, when they will have access to the token, and under what conditions they should have access. These rules provide the basis for the added feature of transaction authorization that smart contracts have. When these rules are met, then the smart contract authorizes a transaction to occur. An example could be a smart token that provides access to some software. The smart contract allows access when the holder has paid the monthly subscription fee. When this condition is met, the holder can then access their account.
- A state to track the token value based on the pre-set rules. This state records all the transactions and ensures the value of the token is adjusted to the present value after the transactions.
So, smart tokens don’t just contain values, they are ledgers of some sort that authorize transactions and record the data.
How Smart Tokens Work
Now that you know what smart tokens are. How do they work?
Smart tokens belong to a particular blockchain and are protected by private keys linked to an address which are only known by the owner of the token. For example, an Ethereum smart token on Alphawallet representing some value would be in a wallet address that is only accessible by the owner of said token.
The owner of the token can carry out any number of transactions with their token such as:
- Transfer tokens from one wallet to another
- Vote on a decision
- Gain access to a product, feature, or space
The owners of smart tokens can carry out these actions simply by signing with their private keys.
The value embedded in smart tokens varies from token to token. Some tokens can only be exchanged and traded, while others grant access to features or events. An example is the BAYC NFT token that allows holders access to an online space called ‘the bathroom’ where they can draw pixelated images every 15 minutes.
Types of Smart Tokens
There are different types of smart tokens and each type is embedded with different types of values and this affects what they can be used for. The three types of tokens are utility tokens, security tokens, and commodity tokens.
- Utility Tokens
Utility tokens are tokens that have a value beyond their trading value. It is basically a coin token that has added values or benefits for the user. Most Initial Coin Offerings use utility tokens to crowdfund their project. The investors buy these coins with the hopes of making a profit as the value increases but also to get access to benefits that regular token holders in the company don’t have.
These utility tokens in an ICO are limited which drives up the price when demand rises in line with the small supply. When this happens, the price of the token shoots up and investors who sell would make a tidy ROI. Utility tokens are considered investments and on lucky projects like Ethereum’s ICO in 2014 which made an ROI of 442.869%, investors stand to make a tidy profit off the increased value. An example of a utility token is
2. Security Tokens
Security tokens are tokens that represent a stake in the company or decentralized autonomous organization (DAO). These tokens are like securities that show that the holder has ownership rights in the company. There are a couple of differences between security tokens and utility tokens. Security tokens are very regulated, unlike utility tokens. Because they are essentially tokenized securities and bonds, they are regulated by the government. Another difference is in their value. Where utility tokens have added benefits in addition to their tradable value, the value of security tokens lies in the dividends from future valuations. Security tokens can’t be as easily traded as utility tokens although there are new decentralized exchanges built solely for trading security tokens. There are five types of security tokens:
- Real Asset Tokens
- Equity Tokens
- Derivative Tokens
- Debt Tokens
- Hybrid Convertible Tokens
Each of these tokens represents different values of shares from real estate mortgages and real-life assets to the value of shares.
3. Commodity Tokens
Commodity tokens are tokens representing independently valued assets like gold or currency. A good example is the USDT token which is backed by the US dollar. These commodity tokens are new and so far, there is the USDT which might not be fully backed by the US dollar according to rumors. However, commodity tokens could open access for blockchain to enter traditionally controlled markets.
Advantages of a Smart Token
Are there any special advantages of smart tokens? Some of the advantages center around low risk. Smart token holders can easily liquidate their tokens without needing the help of an online exchange. They also aren’t mandated to pay fees other than gas fees. In addition to these, smart tokens are traded at one real-time price instead of going through a bid process where there are different prices to be bid on. This is thanks to the smart contract that maintains a common ground between the smart token and the reserve token.
Smart tokens are digital assets that represent a specific value beyond their tradable values. They are secured and can only be accessed by their owners inputting a private key known only to them. Smart tokens can be traded, used to vote, or used to gain access to special benefits. There are many types and they can be bought for investment purposes.