By now, everyone with an interest in Blockchain and cryptocurrencies will have heard the word token. However, many people will have used the word or even bought tokens, without really knowing what they are. Others will have invested substantial amounts of money in tokens without even knowing it.
The confusion is due to a variety of reasons, including the decentralized nature of the blockchain and crypto scene, in which everyone can be an “expert”, making up their own definitions. So, I will be no different. Here is my definition:
“A cryptographic token is a digital representation of an asset that holds a value, implemented on top of a distributed ledger system”
Tokens can be fungible or non-fungible. The former represents an asset, in which all units are exactly the same, for example, a currency. In the latter’s case, each token may have different characteristics and hold a different value. An example of this may be a property deed. Each property is unique and there is a wide range of property prices.
Let’s focus on fungible tokens for now and leave non-fungible tokens for another article.
Tokens vs. Cryptocurrencies
Although you sometimes hear people talk about the “Bitcoin token”, most people in the blockchain scene would argue that there is a subtle difference between a cryptocurrency and a token. In a sense, a cryptocurrency is a special kind of token that is the native currency of a blockchain and is issued according to some rules defined in the blockchain’s protocol. In contrast, what we usually call a token is issued according to some rules defined in a smart contract on top of an existing blockchain.
The ERC-20 Token Standard
ERC-20 tokens are implemented in smart contracts on Ethereum, according to a standard defined in EIP-20. The standard defines a common interface all tokens should implement, in order to be compliant. This interface includes a token name and symbol, the number of decimal places supported, functions to query balances of different accounts, and various ways of transferring tokens between accounts.
Being standard compliant means ERC-20 tokens usually work with Ethereum wallets that support the standard, are easier to integrate with centralized cryptocurrencies exchanges, and can work with standard protocols that allow trading the token on decentralized exchanges, such as the 0x protocol.
Make your own Currency
ERC-20 tokens (and non-standard tokens) are easy to implement. The owner decides the total supply, issuing mechanism, and distribution rules. In essence, you print your own money, a fact used by so-called Initial Coin Offerings (ICOs), also called token sales or crowd sales. Essentially, companies decide to create a token and sell it, in order to obtain funds for their project. Investors buy these tokens in the hope of selling them at a higher price, once the project is successful. Tokens are also typically given some functionality on the platform being developed, such as functioning as an in-app currency.