Blockchain Stories
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Blockchain Stories

Tokens And The Assets

By Lekshmi Pg, Research Fellow Kerala Blockchain Academy

Technically, a “token” is another word for cryptocurrency. But it has now taken on a couple more specific meanings depending on several contexts. The first is to ascribe all cryptocurrencies like Bitcoin and Ethereum. And the second is to explain certain digital assets that run on top of another cryptocurrencies’ blockchain, as much decentralized finance (or DeFi) tokens do. This blog will feature what tokens are all about, their different models and why they are so prognosticated.

To start with, let’s understand that tokens have a massive range of potential functions, from helping decentralized exchanges possible to sell virtual merchandises of varied nature. The concept of token gained momentum with the rise in the popularity of bitcoin.

The introduction of bitcoin was a turning point in the history of currency. The digital currency intended to provide an alternative payment system that would operate free of central control. Bitcoin’s innovative decentralized network was a ground-breaking achievement then. Soon, the underlying technology, blockchain, was brought to the experimentation tabletop to surface with more purposes. Today, blockchain stands tall with the coloring of programmability, enabling solutions for many longstanding problems.

The second-generation blockchain, Ethereum, expanded its predecessor’s vision by building a global network of computers that links users to a marketplace of decentralized applications (DApps). Today, the “Mother of DApps”, Ethereum is adding value to myriad industries like Finance, Healthcare, Supply Chain etc. with a host of novel solutions. The Ethereum blockchain is powered by its native cryptocurrency — ether (ETH) — and enables developers to create new types of ETH-based tokens that power the DApps through smart contracts.

What are Tokens?

Tokens are the digitized form of real-world objects or the assets we possess. Ethereum tokens can represent anything from a physical object like gold (Digix) to a native currency used to pay transaction fees (Golem). In the future, tokens may even be used to represent financial instruments like stocks and bonds. Note that the properties and functions of each token are entirely subjected to its intended use. Tokens are not limited and restricted to one specific role of ownership; they can serve several purposes depending on the place of residence. For example, tokens can prove ownership over own’s asset. Also, it can act as a gate pass for entering applications or paying fees by the user. Likewise, tokens can be a reward, representational rights or shares in the blockchain platform.

There are different varieties of tokens that have unique purposes. Let’s take a look:

Types of Tokens

  1. Utility Token- It’s a special type of token that helps in the capitalization or financing of projects for startups, companies or project development groups. These tokens allow users to have future access to a company’s product or service. They permit users to access something owned by the token provider. For example, a utility token can serve as permission to play games or access a service provided by the token provider. Brave’s Basic Attention Token(BAT) is used to tip the content creators through the Brave browser.

2) Security Tokens- These tokens represent a share/ stock within the provider platform. By owning a security token, one gets voting rights on the provider’s company or project. Security Tokens can be considered a financial asset. Therefore, these tokens should be regulated with some financial rules. BCAP tokens are security tokens provided by the Blockchain captain.

3)Reward Tokens- As the name suggests, these perform like a reward for attempting some tasks in the blockchain. It can be solving a cryptographic puzzle or winning a game. The value of the reward token depends on the popularity or acceptance of the company/project. Gods Unchained is a free-to-play card game where players get high-ranking cards from other players on winning games.

4)Asset Tokens- They are digital claims on a physical asset like gold, crude oil, real estate, equity, and so on. Tokenization of these assets makes the buying and selling of the assets more decentralized. OpenSea is an open platform where we can create tokens of our assets such as art, collectables, music, photography, etc.

5)Currency Token/ Cryptocurrency-The most heard on blockchain — Bitcoin, Ether, etc. are currency tokens or cryptocurrency. These tokens are famous for their liquidity nature. The introduction of cryptocurrencies paved the way for decentralized exchanges.

How Tokens Are Generated

To generate tokens, we need initial funding, which may be Crowdfunding. Crowdfunding is a term supported by blockchain in which more than one individual contributes to the underlying cost of generating a token by deploying a smart contract to develop it. ICO (Initial Coin Offering) is one where a company can offer tokens to investors. These tokens may have some utility, such as access towards the company-provided service or using of a particular product or a company stake. Tokens are generated, protected, and transferred using cryptographic algorithms. These tokens are self-generated while running the smart contract corresponding to an application in the blockchain network.

Tokenization

Crypto tokens, like cryptocurrency, they hold certain value and can be exchanged. They are designed in a purpose to represent certain physical assets or traditional digital assets, or a certain utility or service. The process of creating crypto tokens to serve these purposes is known as tokenization.

Token Standards

We have many token standards. Standardization ensures that the newly created tokens are compatible with the existing blockchain network, also the decentralized applications, and exchanges. The proposal for token standards is included in EIP 20 (Ethereum Improvement Proposal). The most acceptable token standard is the Ethereum token standard, ERC(Ethereum Request for Comment). The token standards define a set of functions through which we one can communicate with the tokens.

Some popular ERC standards are as follows:

There are also token standards for blockchains other than Ethereum. Some of them are :

EOS Blockchain token standard defined in smart contract eosio.token.

NEP5 defines the token standard for the NEO blockchain.

TZIP7 introduces a token standard for the Tezos blockchain.

Fungible(ERC-20) & Non-Fungible(ERC-721) Tokens

Fungible tokens are tokens that corresponds to the assets that are interchangeable or exchangeable. The perfect example of this category is cryptocurrency. In the case of Fungible tokens, each fraction of the token can be exchanged with the next. By taking the example of Ether, the cryptocurrency of Ethereum, one ether (ETH) is equivalent to another ether (ETH).

Unlike fungible tokens, non-Fungible tokens(NFTs) are not interchangeable; one NFT cannot be exchanged with another of the same type. Artworks, copyrights, voting rights, and any real-world assets can be tokenized using NFTs. One can’t exchange an NFT for a painting with an NFT of another painting since they represent original works. CryptoKitties, introduced in the early 2017 on the Ethereum is an early representation of an NFT.

With blockchain industry to mature continuously, the number of digital assets will also skyrocket in accordance to the multifaceted needs of ecosystem. Taken that, creating new assets within the digital world will definitely improve the way countless industries operate, interact, and generate value, towards new social and economic possibilities.

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Kerala Blockchain Academy

Kerala Blockchain Academy

One-stop solution for quality blockchain education and research. Offers best in class blockchain certification programs in multiple blockchain domains.