In this post, we’ll unpack all you need to know about blockchain tokens, defining exactly what they are, the two types, tokenomics, how they work, their purpose and more.
What Are Blockchain Tokens?
Blockchain tokens are digital assets that are issued and managed on a blockchain network and represent ownership over assets and services.
Fungible Tokens Versus Non-Fungible Tokens
Tokens come in two types; fungible tokens and non-fungible tokens.
Fungible tokens are uniform, interchangeable, divisible and also liquid. An example of a fungible token is Bitcoin.
Non-Fungible tokens are unique, non-interchangeable, non-divisible and also illiquid. An example of a non-fungible token is digital art.
Tokenomics
Designing systems of incentives that underpin blockchain networks is known as tokenomics — a blend of “token” and “economics.”
Well designed tokenomics should help the network flourish by incentivising everyone who participates in the network, including developers, users and creators.
How Do Blockchain Tokens Work?
At their core, blockchain tokens operate on a decentralized ledger technology (DLT), where each transaction is recorded across multiple computers, thus ensuring transparency, security and immutability.
Anything that can be represented in code can be wrapped inside a token to be either bought, sold, used, stored, transferred or any other conceivable interaction.
Smart contracts govern the capabilities of tokens, therefore automating their behaviour and ensuring adherence to predetermined criteria.
Users manage their tokens via either software (hot wallets) or hardware (cold) wallets. Wallets are to blockchains what web browsers are to the internet; they are interfaces for users.
What Is Their Purpose?
Blockchain tokens allow information and value to be transferred, stored and verified in an efficient and secure manner. Thus, they facilitate the representation of property rights over physical or digital assets.
The read (Web 1.0) era of the internet was defined by the website, which encapsulated information. The write (Web 2.0) era of the internet was defined by the post, which encapsulated publishing. The latest own (Web 3.0) era of the internet is defined by tokens, which encapsulates ownership.
Summary (TL;DR)
Blockchain tokens are digital assets issued and managed on a blockchain network that represent ownership over assets and services.
Tokens can be either fungible, which are uniform, interchangeable, divisible and liquid, like Bitcoin, or non-fungible, which are unique, non-interchangeable, non-divisible and illiquid, like digital art.
Anything that can be represented in code can be wrapped inside a token. Smart contracts govern the capabilities of tokens, thus automating their behaviour and ensuring adherence to predetermined criteria.
