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What Is A Token?

what is a token

The term "tokens" is widely used in various areas, but in the field of finance it used to refer to the so-called "money substitute". What is a tokens and their difference from cryptocurrency you will learn from this article.

A token is a unit of account that is used to represent a digital balance in a certain asset. They can be used for various cases in the smart contracts ecosystem which accepts that token. Token accounting recorded in blockchain and access to them is done through special applications using electronic signature schemes.

Types of tokens

There are a number types of tokens:

  • Equity tokens are a subcategory of security tokens that represent ownership of an asset, such as debt or company stock.
  • Utility tokens reflect some value within the business model of the online platform (reputation, scores for certain actions, game currency).
  • Asset-backed tokens are digital commitments to real goods or services (pounds carrots, etc.).

What is token backed by?

Only asset-backed tokens can be backed by. In this case, a token is a digital double of a real (physical) asset or service. For example, one token can be equated to one square meter of living space or the ability to go for one session to a movie theater. The guarantor of the conversion of the token into security is the organization itself, which stores goods or provides services.

What is asset tokenization?

Tokenization is the process of transforming the accounting and management of assets, where each asset is in the form of digital token. The essence of tokenization is the creation of digital analogs for real values ​​with the aim of quickly and safely working with them. For example, the owner of a bakery creates an electronic accounting system in which he issues digital obligations for rolls - tokens. Having a fairly good reputation, the owner of a bakery can pre-sell rolls, selling tokens on trading floors on the Internet. In this case, any owner of tokens can come to the bakery and exchange one token for one roll.

What is the difference between a token and a cryptocurrency?

Unlike cryptocurrencies, tokens can be issued centrallized ( regulated of a single organization) and decentralized (under the control of a predetermined algorithm). Processing and acceptance of transactions can also be performed centrally (all servers controlled by one organization). The pricing of the tokens may depend not only on the balance of supply and demand, and from additional aspects (linking to an external asset, conditional rules issue or remuneration). In addition, unlike the crypto token does not have its own blockchain.

How to buy tokens?

Tokens can be purchased via the online trading services (exchange services), or in private transactions (buyer and seller agree personally). The process of trade tokens is identical to the process of trading cryptocurrencies. In addition, the issuers of the tokens is often inserted in the web pages of their projects with the opportunity to purchase tokens using traditional electronic means of payment.

Where to store the tokens?

In the processes of transfer and storage, tokens are similar to cryptocurrencies. To do this used special wallets, which realize the storage and processing of keys, as well as the formation and signing of transactions. Typically, these applications are part of the infrastructure of the tokenization platform.

What are the benefits of tokenization?

  • Accelerates the trade process, as it does not require the movement of real assets and registration of documents for property rights.
  • Increases the security of storage and transfer by accounting transactions on the basis of blockchain technology.
  • Removes the need to trust intermediaries, since their participation can be described at the level of a smart contract or they can be excluded from the chain.
  • Increases the functionality of the infrastructure, extends the platform by adding additional modules (multi-level authentication, invoicing, regular payments, replenishment cards).
  • Improves ease of use, because many of the features of the platform can be integrated into the user interface of the mobile application.

What are the risks and problems of tokenization?

  • Personal user keys can be lost or stolen by hackers that are impossible to predict and insure.
  • Provision of privacy in a public block chain is a complicated task because of the verification process of their transaction data must be available.
  • The challenge of scale in a decentralized accounting system, as a decentralized database has a strict limit on capacity.