A token is essentially a token of value or an instrument used to represent digital assets, access rights or services in a given digital ecosystem. Unlike traditional currencies, tokens do not have a physical existence; they exist exclusively in digital environments and are managed through blockchain technologies or other digital storage and transmission solutions. For example, a token in a mobile rewards app may represent accumulated points that users can use to purchase services. In the same way, tokens in a blockchain network can be used for financial transactions, investments or votes within that platform.
Types of tokens
They are divided into several categories, each with a well-defined purpose. Below you will find the main types of tokens:
1. Utility Tokens
These are used to access services or products on a specific platform. A common example would be tokens used to access additional features on an online platform or to pay usage fees.
Example: the BAT token (Basic Attention Token) is used to reward Brave browser users for watching advertisements.
2. Security Tokens
These tokens represent rights to an asset such as a share in a company or a financial benefit. They function as investments and are regulated in a similar way to traditional securities.
Example: A secure token could represent part of a digitally owned real estate property.
3. Non-Fungible Tokens (NFT)
These are unique, non-replicable tokens used to represent ownership of unique digital objects, such as digital art, video clips or objects in video games.
Example: Artist Beeple’s famous NFT “Everydays” was sold for a record 69 million dollars.
4. Stablecoins (stable tokens)
These are created to maintain a stable value, usually pegged to traditional currencies such as the US dollar or euro. They aim to eliminate the volatility associated with other cryptocurrencies.
Example: Tether (USDT) is a popular stablecoin pegged to the value of the USD.
How are tokens used?
Tokens are used in a variety of ways, including:
- Financial transactions: tokens enable fast and secure transactions between parties without the need for intermediaries such as banks or other financial institutions.
- Access to products and services: In digital ecosystems, they are often required to access certain services, buy software extensions or attend events.
- Rewards and loyalty: Companies use tokens as part of reward programs to motivate users to interact with their brand. For example, a platform might offer tokens to those users who actively participate in forums or use platform features.
- Investment: Many investors purchase tokens in the hope that their value will increase, similar to buying shares in a company.
- Collaboration in digital communities: Tokens can be used to stimulate collaboration on open-source projects or to allow community members to vote on important decisions.
Pros and cons
Advantages:
- Decentralization: Most are administered via blockchain, reducing the need for a centralized mediator.
- Transparency: All transactions are stored in a public ledger, making the process easy to verify.
- Flexibility: They can be used for a variety of purposes, from quick payments to investments.
Disadvantages:
- Volatility: Their value, especially those related to cryptocurrencies, can fluctuate significantly.
- Uncertain regulation: Laws are still developing in many countries.
- Security risks: If the digital wallet that stores them is compromised, the risk of loss is high.
Have a favorite cryptocurrency you want to add to your investment portfolio? You can find an up-to-date price by visiting our dedicated cryptocurrency price list page.