What is the idea of token?

What is token?

A lot of people have heard about what cryptocurrency is, but there is hardly a person clearly understanding what it is. Token is even more questionable. What is the idea of token, then?

First, it is important to think about typical characteristics of cryptocurrency. Cryptocurrencies are calculation units belonging to and moving within decentralized, cryptographically protected database – blockchain. Blockchain updating (along with transaction maintenance) is performed by the miners, who “mine” new blockchain blocks using their computing power (according to the initial program algorithm). Every miner, who has mined a block, is being awarded with a particular amount of cryptocurrency determined by the mentioned algorithm.

Broadly speaking, token is a kind of any existing debt holding, or services contract; a person, who has launched a token, is obliged to provide a buyer with anything useful, service, or good. Here we can use an underground passage as an example for the one, who buys and uses a specific token, or free lunch in a particular restaurant for a person who has a special ticket. In a narrow, but commonly applied sense, token is a digital asset initiated by a private individual, or legal body with a specific purpose (to be used as stocks in course of ICO fundraising for instance). 

Sometimes, tokens are called cryptocurrencies and added to altcoin number. However, it is not quite a commonly accepted token denomination due to there are significant differences between tokens and ordinary cryptocurrencies. It would be better to consider tokens as a secondary structure of the initial cryptocurrency, and its blockchain. Besides, there are also such exclusive projects as Ripple. 

What are the differences and similarities between tokens and cryptocurrencies?

Here are the differences and similarities between tokens and cryptocurrencies:

— Tokens are as cryptographically protected as ordinary cryptocurrencies.
— Token transactions are as speedy and handy as cryptocurrency transactions.
— Tokens are more centralized than cryptocurrencies; that is also the case of emission. A person or unity can decide anytime to issue tokens with the help of specialized platforms (Ethereum or Waves). There is no independent token mining. Most often, tokens are issued in course of ICO maintenance.
— Token rate does also depend majorly on its issuer (thus, more than 90% of Ripple tokens belong to its issuers).
— Blockchain is an essential part of technology for the majority of cryptocurrencies. Tokens do not have their blockchain. However, tokens are usually based on blockchain of a platform used for their creation.
— Reflecting on the above, tokens are special “vouchers” for services (or share of a company that has maintained ICO, for instance). In its turn, the main purpose of the cryptocurrencies is an effective price transit from one party to another.
There are also cryptocurrencies with token limited properties. For example, Ethereum was first thought to be used as “gas” to ensure the work of smart-contracts. At the same time, it has a blockchain and can be mined.

How to buy, keep, and deposit tokens safely?

You can buy tokens for cryptocurrencies, which they were based on (most often, ETH), in course of ICO, or after ICO on one of the crypto-platforms trading the selected tokens.

How does token sale in terms of ICO look like? Usually, ICO sponsors provide address of their personal wallets, for example, ETH wallet. After ICO completion, investors receive the issued tokens according to the amounts of their investments.

Here it is important to mention that there is no specific wallet for the majority of tokens. However, MyEtherWallet, a standard ETH wallet, provides “balances” for all tokens based on ETH; new tokens will arrive in the appropriate token “balance”. Further, you will be able to manage these tokens just like you manage cryptocurrency, in particular, receive new tokens, or transfer them to anyone.

When you buy tokens on the platform, they will be deposited on the appropriate account in your wallet. You will have an opportunity to resell them later, or withdraw on any third-party wallet supporting tokens. By the way, if you keep funds neither in ETH nor WAVES but bitcoins, then, you need to buy bitcoins on the platform if you want to invest bitcoin in tokens effectively.

Trading pairs with tokens can be usually found on the platforms. Thus, EXMO crypto-platform ensuring bitcoins online has recently added KICK token to the trading. Besides, Ripple and Tether tokens are also traded on EXMO.

Financial perspectives and risks of token investments

There are tokens that have a potential to make their holders richer many times more. It happens due to the successful development of the start-ups initiating their issue. In course of ICO these tokens are growing in price, rapidly increasing a holder’s profit. However, you can never be sure that the purchased tokens will preserve their initial price. Their price can drop due to the interest rate decline. It can also happen that in course of ICO deployment the unfair sponsors first raise funds claiming to enrich the potential investors, then disappear.

For that reason, if you are about to purchase tokens in course of a particular ICO, please, make sure to evaluate honesty of people organizing ICO, their competence, and commitment.