Author: Mário Havel
In the world of cryptocurrencies, you will encounter many terms that are often confused and can be confusing. Token is exactly such a concept, which may not be immediately clear, especially for newcomers. However, it represents a set of significant projects in the crypto ecosystem, bringing new possibilities and tools to it. Tokens are easy to create, have cryptocurrency properties, and can represent the tokenization of any real-world and digital-world asset — corporate stakes, loyalty points, bills of exchange for physical goods, whatever human tokenization creativity can hold. This article will shed more light on what those tokens are, how they work, and which might interest you.
What exactly is that token?
The word token is nothing new, and you must have heard it before the cryptocurrencies came to mind. However, to better understand what a token means in a cryptocurrrency understanding, let’s distinguish its meaning. Physical tokens as a substitute for money are perhaps as old as money itself. Still used and widespread forms of physical tokens such as casino tokens or product vouchers can be included in this category. If you are looking for digital tokens, you may come across various IT departments where the token represents the right to perform the operation.
So we will deal with digital tokens, but in the sense of an asset.
Crypto tokens have become popular for their wide range of uses and simplicity. Because virtually anyone can create their own token and come up with a purpose, creativity is endless. Mostly, however, it revolves around trends. Some traditional types of tokens are:
- Utility tokens – represent a service that you can exchange for them. Below you can imagine coffee in a cafe or cloud capacity, which you pay with a token issued by the service provider. This type of token represents most of the Initial Coin Offering projects known from the boom in 2017. The company uses them to sell tokens as an ICO to start a business, which the investor can later exchange for its services or sell for appreciation.
- Securities tokens – are a digital representation of an actual asset, such as a stake in a company. They bring the benefits of cryptocurrencies to securities trading, but at the same time, due to this nature, they often fall under strict financial regulations.
- Stablecoins – it is clear from their name that their goal is stability. Their value is firmly linked to the asset on which they are built or covered by it. They bring stability to the volatile world of cryptocurrencies while retaining p2p properties. They allow traders to easily secure value and have a stable unit of account.
- Collectible tokens – irreplaceable tokens, each unit of which is unique. This uniqueness is mainly used for collecting games and gamification.
It is not a blockchain like a blockchain
The existence of these tokens was made possible by the expansion of cryptocurrencies. Today, you can see tokens traded on the stock exchange among traditional cryptocurrencies, and at first glance you will not even recognize them from traditional cryptocurrencies. This fact must be distinguished – the token is not a cryptocurrency. A more accurate name could be a cryptocurrency asset. Then how do those tokens work?
A normal cryptocurrency like Bitcoin uses a blockchain on a decentralized network to send p2p transactions. In addition to Bitcoin, however, you have certainly heard of the second most common cryptocurrency – Ethereum. In addition to simply sending transactions, it can use its network for much more. In addition the Ethereum Virtual Machine enables smart contracts to be executed, providing a platform for creating your own tokens over Ethereum, for example.
You can imagine a smart contract as similar to a normal contract – under certain conditions, it will perform the given operations with the money that is sent to it. Of course, it is stored on a blockchain, making it completely transparent and unchanging. In themselves, smart contracts have purposes limited only by the author’s creativity – loans, insurance, escrow, crowdfunding or just creating your own token.
The token is thus actually created by a smart contract that takes care of its properties, transactions and balances at the addresses. For the Etherea platform, send Ethers to this smart contract and return a number of tokens created. It’s really as simple as it might seem – everyone can create their own token. All you have to do is learn how to write a simple program in Solidity or use services such as Token Factory, Tokenmint, where you just enter the required parameters and create a token for you.
However, there is a compatibility issue. If everyone programmed the tokens to their liking, supporting each different token would require different code. This would be unsustainable for token wallets or stock exchanges. Therefore, instead of anyone who wants to program a token to have to reinvent the wheel, standards have been created in the community for creating tokens that allow for clarity and especially their compatibility. As a user, you only need one wallet in which you can store any arbitrary tokens and there is no need to create special rules for each one. However, there are several of these standards, and so are platforms that support tokens. Let’s take a closer look.
Tokens on the Ethereum platform
ERC-20 tokens on Ethereo are the leader and pioneer of the current token market. The abbreviation ERC stands for Ethereum Request for Comments and 20 is simply the proposal number within EIP-20. The meaning is therefore similar to when someone in the context of Bitcoin talks about BIP.
Having your own ERC-20 token is no science. To create such a token, it is necessary to define 9 things – optional name, abbreviation, decimal divisibility and 6 mandatory methods that define their maximum number, address balance control, transfer and release controls. At least this defines each such token in its smart contract.
This standard was the first to receive massive adoption, and to date, Etherscan has registered more than 260,000 contracts for ERC-20 tokens. No wonder, since token creation is so easy. Of course, only a fraction of them are publicly traded and widespread.
Thanks to this design, you can receive all different tokens to your Ethereum address. They are supported by many advanced software and hardware wallets – MetaMask, MyEtherWallet, Coinomi, from the hardware Vault and Ledger.
ERC-721 is another extended standard for tokens over Ethere. However, their target is different from the ERC-20. They represent so-called non-fungible tokens (NFT), ie unique, irreplaceable tokens. The property of cryptocurrencies like Bitcoin, tokens like ERC-20 or even classic fiat money is their interchangeability – I practically don’t care what Bitcoin I have in my wallet or coin in my pocket, it still represents the same thing with the same value.
However, the ERC-721 allows each token unit to be unique. The result is uses, for example, for collectibles, as uniqueness is a property of collectibles. The most common applications are adorable, beloved and hated Cryptokitties. Each cat is unique, representing a token that you can exchange for Ether or other cats. Collectibles in games are a huge industry, so they have a strong economic potential for tokenization. For example, in recent months, land prices in virtual reality have been rising.
In addition to these most common, there are a number of other ERC standards for different types of tokens. Some aim to improve the current extended standard, others come with brand new ones.
The ERC-1155 enhances collector NFT tokens by allowing multiple types of tokens with different properties to be defined in a single contract.
A significant problem with the ERC-20 is the ability to send tokens to the wrong contract. However, a simple user error will cause these tokens to be lost forever, as this contract has no way of dealing with them. ERC-223 therefore makes it possible to monitor incoming transactions and, in such cases, to reject them. A similar solution is provided by the ERC-827, while adding the ability to send data with tokens. The transmission of information at the protocol level also introduces the ERC-777.
Other token platforms
Ethereum can be considered the most widespread and time-tested platform for tokens, but it is far from the only one. Blockchain smart contract platforms have grown like mushrooms after rain, with many copying the Ethereum Virtual Machine concept.
Of those already widespread, it is worth mentioning, for example, the Chinese NEO, whose ERC-20 is called NEP 5. Very similar is also FA1.2 on the Tezos platform or TRC10 Tron tokens. Next we could mention Stellar, Waves, EOS, NEM,… Smart contract and create a token you can on any of them. Some tokens even use multiple platforms as a transport layer.
In addition to these concepts, the community around Bitcoin also looked at the possibilities of tokenization. Of course, the Bitcoin protocol itself does not allow smart contracts at such a level as to enable the creation of tokens such as Ethereum. Therefore, the tokens above Bitcoin are solved by other layers of the bitcoin network. This concept can be familiar to you from the Lightning Network, which builds its operation on the Bitcoin blockchain.
Of the protocols using the Bitcoin network, the Omni Layer should be mentioned. It has been operating for a long time, once under the name Mastercoin, and was a pioneer in this field. The well-known Tether token was created to work on this layer. So, as you know, Omni allows you to create smart contracts and custom tokens. It uses the bitcoin network for time stamping as the backbone and source of truth, into which it writes the status of transactions every few blocks. The basic token is OMNI, within its operation we can compare it to ETH on the Ethereum network. Despite its advantages and early application, it has not received widespread adoption except Tether.
The second, newer and similar concept is the Liquid network. Developed by Blockstream, Liquid has gained a lot of attention and controversy. It’s a Bitcoin sidechain built on Elements that allows for faster, private transactions and, of course, token creation. Its main purpose is to facilitate, speed up and reduce the cost of transactions, especially for traders. As a sidechain, it produces custom blocks with an average time of 1 minute, so transactions are fast and improve Bitcoin scaling. However, it does not use PoW for this block creation, but the Strong Federation uses a consensus mechanism. The entire network is thus managed by exchange offices and financial institutions, which benefit from its use. It is thus more centralized, but no particular institution or Blockstream has ultimate power over it.
In addition to fast and cheap payments, it also provides the possibility of private “confidential” transactions, in which the amount transferred is hidden. The basic asset is L-BTC, which you get by locking a normal Bitcoin to a special address. After confirmation, L-BTC is released, the value of which is of course equal to BTC. To create additional tokens, smart contracts are not used as with other platforms, but multisig similar to that used with Bitcoine. Even Blockstream ported its implementation of c-lightning to Liquid, allowing Liquid tokens to be sent over the Lightning Network.
Recently, therefore, many tokens have been created over Liquid, which represent cryptocurrencies or fiat and bring the benefits of Liquid to them.
When talking about Bitcoin tokens, we must not forget the concept of Colored Coins. It uses a transaction script to define sent bitcoins as units of an asset. Color Coins implementations such as Color Spark, CoinPrism, or ChromaWa do exist, but have never received such widespread attention. However, this concept was caught by the party around Giacomo Zucca, who came up with the idea to move him to the Lightning Network. This created the RGB project, which is currently the easiest for Bitcoin fans to create tokens over Bitcoin. This third layer uses client-side validation designed by Peter Todd. It would bring scalable, private and instant token transactions. Development is very active, but there are still many challenges ahead.
A few interesting tokens
Once we understand how tokens work on crypto platforms, let’s take a look at a few interesting ones that you can buy on the ATM Cryptodiggers network.
Let’s start with the most famous and widespread, the Tether token, which falls into the category of stablecoins. As its USDT symbol suggests, its price is still maintained one-on-one with the US dollar. It has been operating since 2014 and during that time it has also gone through some controversy, especially regarding the coverage of real dollars. Despite everything, it is the most widely used and can be found on many stock exchanges. Like other stablecoins, it gives you the opportunity to use the currency from the banking world in the cryptocurrencies, ie fast, compatible with crypto exchanges, without unnecessary questions or fees. Tether is exactly an example of a token that uses several platforms as transport technology, namely Bitcoin – the mentioned Omni as well as Liquid, Ethereum, Tron and EOS. Recently, Tether announced another token – Tether Gold, whose value will be equal to the price of gold. The possibility of using gold as a cryptocurrency has aroused a response in the community.
USDC is another dollar stablecoin. It was developed by the Center funded by Coinbase and Circle. It aims to create a stablecoin with financial and operational transparency. It is fully collateralised by US dollars and seeks to build an ecosystem for financial institutions, not just ordinary stablecoin. The strategy of covering stablecoins varies – they can be covered algorithmically, by cryptomenas, fiat names or a combination. USDC relies on real asset coverage and proper legal regulation. It is implemented as an ERC-20 token and can be found traded on most popular exchanges.
The last stablecoin we will mention is Binance USD, BUSD, created by Paxos in cooperation, surprise, with Binance. Since the Binance exchange does not support the trading of cryptocurrencies directly for fiat currencies, stablecoins are key for it. Creating one’s own cannot therefore be detrimental. This created BUSD, covered by US dollars insured in the bank and audited on a monthly basis. However, it still lags behind Tether, which dominates Binance. Trading volumes are orders of magnitude smaller, but BUSD capitalization is growing rapidly. It is also built on the ERC-20 standard and its advantage is low fees on the Binance platform.
Finally, from the Binance workshop, we will mention the traditionally popular BNB token, Binance Coin. As you probably already know, it was created by the Binance Stock Exchange and its purpose is to support the Binance ecosystem. In practice, this means that it can be used to pay fees on the stock exchange. Although its price has risen recently, the success of the BNB is linked to the success of Binance. To increase its price, Binance introduced a deflationary plan. Each quarter, it uses 20% of its profits to buy a BNB that it burns publicly. This proof of burn process is expected to last until 100 million tokens remain. There are also plans to create a decentralized exchange with its own Binance Chain blockchain, whose BNB should be a native token.
Tokens on cryptocurrency platforms have brought a new kind of asset that can be tailored to any use. The ability to have an asset with the same properties as a cryptocurrency without the need to start your own blockchain gave rise to a wide range of projects. As a result, the token market is wilder and more unstable than the cryptocurrencies themselves. Unfortunately, the vast majority of them have no practical real use or feasible business model. The user should be aware of what he is investing his money in and what he can get. Whether stablecoin to maintain value in trading or some utility token to more efficiently get the service it needs.