What Is a Crypto Token? | Types of Tokens | Notum

Intro

Tokens are assets that help information and value be transferred and stored in the blockchain ecosystem. These tokens have different forms and can be programmed with characteristics that make them unique, which definitely expands their usage. That’s how security tokens, utility tokens, and cryptocurrencies became widely popular among people offering liquidity, improving transaction efficiency, and increasing transparency. 

Different Types of Tokens

If we are talking about blockchain technology, tokenization is the process of converting something valuable into a digital token that could be used on a blockchain platform. Tokenized assets on the blockchain have two forms: tangible assets, physical like real estate, precious metals, cash, vehicles, art, or intangible assets, not physical like patents, goodwill, ownership rights, or content licensing. Anything can be tokenized once it is an asset that can be possessed, has value, and can be included in a larger asset market. 

Security tokens are a particular investment, such as a share in a company, voting right in a company or other centralized organization, or some tangible or digital thing of value. As such, these tokens are an entirely new type of digital asset. 

Tokenized securities serve as a straightforward digital stand-in for its underlying security and are typically designed to be easily exchanged or used. In other words, tokenized securities mainly exist to broaden the market accessibility or liquidity of the security being tokenized, without the addition of unique programmed or cryptographic characteristics such as those found in security tokens.  

Utility tokens are access to a definite product or service, usually on a particular blockchain platform. Utility tokens may be used to run a blockchain network’s consensus mechanism, supply the operations of a decentralized market, pay transaction fees, or grant holders the right to submit and vote on decentralized platforms. Security tokens are mainly used to establish ownership rights, and utility tokens are more for practical usage.

Currency tokens are designed for trading and spending. They can be based on underlying assets or not. Their value is straightly linked to the way how they can be distributed.  

It doesn’t matter if a crypto token is designed for a particular purpose, users can use it for different aims. For example, utility tokens are not designed to be speculative investments, although many users buy them hoping that their price will increase sooner or later. 

On top of this, tokens can be created to be either fungible or non-fungible, depending on their usage. Fungible tokens are identical, not unique, and could replace one another. As for non-fungible tokens (NFTs), they have a unique, one-of-a-kind nature and can’t be replaced. 

Some bright examples of NFTs are digital art and collectibles you can buy on various NFT marketplaces such as Axie Marketplace, OpenSea, and Larva Lab. As such, fungible tokens are typically used in environments where individual traceability is not a concern (such as in providing market liquidity), whereas NFTs are used in instances where uniqueness and provable scarcity are valued (such as in digital art and collectibles).

The Benefits of Tokenization 

Let’s try to categorize some prominent benefits of tokenization in the blockchain: 

Liquidity

Once assets are tokenized, they are available to a wider audience, which increases market liquidity. Tokenized assets can be exchangeable online and that allows investors to get partial ownership of a token’s underlying asset. As a result, those tokens can contribute to the liquidity of existing markets and give a broader range of investment opportunities to investors. 

Tokenized assets can be created to be freely exchangeable online and allow investors to get so-called fractional ownership of a token’s underlying asset. That means that tokens can contribute to the liquidity of markets and give more investors a wider range of investment opportunities.

• Fractional ownership means owning an amount of an asset represented through the process of tokenization. Tokens are fully divisible, so they can be multiplied or divided into very large or small amounts. A user can buy a very large or very small number of a specific asset like Bitcoin (BTC) or Dogecoin (DOGE). 

Faster and Cheaper Transactions

Crypto tokens allow investors to avoid any kind of intermediaries and other third parties who are usually involved in the traditional financial system. This reduces the transaction costs and processing time of exchanges, allowing for a more straight and cost-efficient method. As crypto tokens are on the blockchain, they can be traded and sold 24/7 worldwide. 

Transparency

Crypto tokens exist on the blockchain, and that also means a user can track down the transaction history in a verifiable way. All transactions can be recorded automatically and that transparency guarantees the legitimacy of each token’s listed in history. These possibilities of crypto tokens help them to achieve a level of reliability that most other digital assets cannot provide. Tokens help to transfer, store and verify information in a secure and efficient way. 

Lower level of red tape 

Thanks to “smart contracts”, many tiresome manual processes can be automated, while the clearing and settlement processes can become simpler and more efficient. As blockchain removes middlemen’s interference, it makes the financial service sector more accessible for anyone who wants to try their hand at.  

Closing Thoughts 

Tokenization is transforming the way we manage our holdings day by day. Blockchain technology develops extremely fast and grabs more areas of the financial services sector continuously. Anything can be represented and stored on a P2P network, and that’s both — making access to assets free-for-all and providing an incredible level of online transparency and security. People have already tokenized their real estate, art, commodities, and some virtual assets, and even such objects as bottles of wine or a piece of jewelry. The token-based economy is not a fantasy or a thing that is impossible to create, in fact, there are companies who are working on tokenizing everything. 

Of course, there are still some issues as humanity didn’t switch to blockchain totally, but it’s a question of time and the answer depends on how quickly countries and governments will embrace a new concept of blockchain technology and all the things that go together with it.