Why do we need tokens in crypto?
First things first — what are tokens in blockchain technology?
Tokens are digital assets or units of value that are created and managed on a blockchain network.
They can represent various things, including currencies, assets, or even access rights to services within the blockchain ecosystem.
Tokens are typically built on existing blockchain platforms like Ethereum, Binance Smart Chain, or Solana, utilising their underlying infrastructure and smart contract capabilities.
Why do blockchain technologies need tokens?
Tokens serve as incentives for individuals to participate in and contribute to the blockchain network. Miners or validators are rewarded with tokens for validating transactions, securing the network, and maintaining the blockchain’s integrity. These rewards encourage participants to dedicate their computational power, resources, and time to support the blockchain’s operations.
Tokens can function as a medium of exchange within the blockchain ecosystem. They can be used to facilitate transactions between network participants, whether it’s for purchasing goods and services, paying fees for using decentralized applications (DApps), or transferring value. Tokens provide a digital currency that operates independently of traditional financial systems, offering faster, more secure, and cost-effective transactions.
What are use cases of tokens?
Utility tokens are designed to provide access to specific products, services, or features within a blockchain ecosystem. Utility tokens are used as a medium of exchange or a means to access and utilise decentralised applications (DApps) or protocols. They have intrinsic value within the network and are often required to pay for transaction fees, interact with smart contracts, or participate in network activities.
Tokens can grant access to specific features, services, or resources within a blockchain ecosystem. For instance, in decentralised finance (DeFi), holding certain tokens may allow users to access lending and borrowing platforms, participate in liquidity pools, or earn rewards through yield farming. Tokens act as keys to unlock various functionalities and benefits within the blockchain ecosystem.
Tokens can also represent ownership in an underlying asset, such as shares in a company, real estate, or investment contracts. These tokens are subject to securities regulations and are designed to provide investors with ownership rights, profit-sharing, or voting privileges. Security tokens offer the potential for fractional ownership and increased liquidity for traditionally illiquid assets.
In addition, Stablecoins are tokens designed to maintain a stable value by pegging them to an external asset, such as a fiat currency (e.g. USD, EUR, SGD) or a commodity (e.g. gold). They provide stability and can be used as a medium of exchange or store of value within the blockchain ecosystem, reducing the volatility often associated with cryptocurrencies.
Uniquely, Non-Fungible Tokens (NFTs) are tokens that represent ownership or proof of authenticity for specific digital or physical assets, such as art, collectibles, or virtual real estate. Each NFT has a distinct value and cannot be exchanged on a one-to-one basis like fungible tokens (e.g. cryptocurrencies).
To allow community members to participate in the decision-making processes of a blockchain network, governance tokens allow holders to vote on protocol upgrades, parameter changes, or the allocation of network resources. Governance tokens give stakeholders a say in the development and direction of the blockchain ecosystem.
Tokens can also facilitate interoperability between different blockchain networks and enable the exchange of value across disparate systems. Cross-chain bridges and protocols utilise tokens to facilitate the seamless transfer of assets and data between different blockchains, fostering connectivity and expanding the possibilities for decentralised applications and services.
Last but not least, tokens can be utilised to raise capital for projects or ventures. Investors can purchase tokens during these fundraising events, providing them with a stake in the project or access to its future products or services. Instead of equity or debt funding alone, tokens enable innovative funding models and allow for the democratisation of investment opportunities.
In sum, blockchain technologies — through the creations and maintenance of a distributed, immutable ledger — utilises tokens to incentivise miners and validators to ensure the security of the ecosystem. On top of that, tokens, fungible or non-fungible, can provide other use cases, from allowing interoperability between blockchains, to fundraising, digital ownership, governance, exchange of value, amongst others!
