Blockchain Basics

What tokens are and what they do

Today, tokens are used in many areas of life, without anyone thinking about it. In blockchain-backed technology, they are at the center of attention. Here is why.

What is a cryptographic token?

Cryptographic tokens operating on a blockchain are quite similar. They can grant access rights to a specific property or give access to a service or collective good. Like all tokens, they need inbuilt anti-counterfeiting measures. To ensure the validity and security of a cryptographic token, developers use a smart contract. The smart contract is part of an underlying distributed ledger.

How cryptographic token work

In order to be used in that way, cryptographic tokens have to follow a certain set of rules that are encoded in a smart contract. This is why it is called a token contract. Every token belongs to a blockchain address. To access these tokens the dedicated wallet needs to communicate with the blockchain. It also has to store the public-private key pair that is related to the blockchain address.

What kind of blockchain tokens are there?

In most cases, the use case of a token defines its name. FINMA, the Swiss Financial Market Supervisory Authority, classified 4 different kinds of token for instance which can be used in any blockchain-backed field. When they classified the tokens, FINMA was careful to point out that each token could fall into more than one category.

  • Equity Tokens: These can represent for instance stocks or equities. So far only a few companies have attempted to use this kind of token because there is not much regulatory guidance on what is legal and what is not.
  • Utility Tokens: In some publications, the author also calls them application tokens. Generally, people use them to get access to either a product or a service. Utility tokens are rare because their value is based on their limited supply.
  • Payment Tokens: These tokens are created to be used as payment and therefore have no other purpose than to pay for goods and services.

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