You’ve probably heard about Bitcoin, the oldest and most famous digital currency. This technological innovation enabled the creation of a market, virtual assets, or tokens. But after all, what is a token, and what is its relationship with cryptocurrencies? In literal translation, token is a code or sign, usually in physical format. For example, in Brazil the physical two-factor key (2FA) of banks became known as an access token.
In digital finance, the token is an asset that only exists electronically.
Each token has a unique ID, so it cannot be cloned or counterfeited.
Digital gift cards are examples of this application: V-Bucks from the game Fortnite, credits from the Uber app, or an Apple gift card.
Although there are “physical” versions of these voucher cards, the token is effectively the unique identification code, usually a sequence of letters and numbers. In the same way that the gift card code is exchanged for the item or service, the token can be destroyed, in a process known as “burn”. Although not mandatory, it shows the possibility of scarcity, even in the digital universe.
What’s wrong with tokens?
Let’s take a simple case, the scoring of a loyalty program. Even if it involves several companies, there is an entity responsible for controlling the issuance and spending of these tokens. The controller of these tokens is able to change the rules without the need for user approval, placing restrictions or fees on transactions, or even increasing the current total.
How did Bitcoin solve the token problem?
Bitcoin, the cryptocurrency created in 2009, is a token, however, with characteristics that make it special and valuable. Part of this is due to the security of blockchain technology, the public digital record of transactions.
Without this blockchain database, the token would have little value as it would be dependent on the control of a single entity.
What is the advantage of blockchain for tokens?
By distributing this power among the user base, blockchain technology has brought some benefits to tokens:
Your historical record is public and transparent, therefore auditable.
Anyone can validate transactions, so there is no entity or group controlling the token.
Tokens can be freely moved, without the need for an intermediary.
Usage rules, including emission limits, can only be changed if there is agreement (consensus) between users.
Bitcoin was the first token to incorporate the blockchain public database. It was this technology that gave rise to cryptoassets, tokens that use the blockchain database.
What is the difference between token and cryptocurrency?
Token: asset that only exists electronically.
Cryptoasset: token registered in the shared database.
In the beginning, this technology was used only for digital currencies, and among the oldest are: Bitcoin, Litecoin, Dogecoin, and Namecoin. Its function was “basic”, involving only sending these virtual assets between users. It is important to note that these digital currencies, or cryptocurrencies, have their own network. That is, there is a group of people running the software on their machines, responsible for validating transactions and storing transaction history.
Is every crypto asset a cryptocurrency?
No. Gradually, technology evolved, allowing new tokens to be launched taking advantage of the public database (blockchain) of previously established cryptocurrencies. For example, imagine that IBM has a network of servers around the world. It would be the equivalent of this technology giant charging for the use of the network, forcing users to pay for the service of recording operations. Who popularized this process in the universe of digital assets was Ethereum, a cryptocurrency created in 2015 by a young Russian-Canadian. Thus:
Cryptocurrency: a special token, a crypto asset with its own blockchain database.
Cryptoasset: token whose transaction registration depends on the blockchain registration of an established cryptocurrency.
What sets tokens apart?
This technology can be used for various purposes, and may or may not represent a real, physical asset. For example, Litecoin (LTC) exists only in the virtual world, without a backing, or collateral. At the opposite end we have PAX Gold (PAXG), a token whose issuing company, Paxos, guarantees a deposit of 28.35 grams of gold for each coin issued. That is, the PAXG token is a digital representation of that physical amount of gold.
How are tokens created?
The crypto asset, or token using blockchain, is just a record in the public database. In short, it is a program code where information on the number of tokens in circulation and their owners are stored.
Some tokens have companies responsible for their maintenance, but this is not mandatory.
Brokerage houses (exchanges) are free to choose which tokens they wish to make available for trading.
The price of the tokens is determined solely and exclusively by those interested in trading at each brokerage house.
What are tokens for?
Any token can be used for payments and remittances. This is a characteristic of digital assets registered on the blockchain, the public cryptocurrency database. However, there are tokens created with specific purposes, for example:
Smooth Love Potion (SLP): required to create “puppies” of monsters in the game Axie Infinity.
Chainlink (LINK): required as a guarantee deposit for the Chainlink system to guarantee the honesty of information providers.
Uniswap (UNI): participation in the governance (vote) of the decentralized brokerage Uniswap.
Barcelona fan token (BAR): digital asset on the Socios.com platform that entitles you to exclusive discounts and services with the football club.
None of these tokens have as their main function the exchange for services, goods or money, but their commercialization is free. That is, people can transact these digital items as and when they want, even outside of exchanges.