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What are tokens?

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Not all blockchain networks have cryptocurrency, but all networks allow for the issuance of some kind of token. A token - much like cryptocurrency - can act as a bearer instrument and be used to transfer value between two parties over a blockchain network. It’s important to note that tokens are very flexible and may not be bearer instruments.

A significant difference between a cryptocurrency and a token is who actually creates them, see figure 8. A token is created by a single party that would like to account for something of value. In contrast, a blockchain network generates a cryptocurrency as a reward mechanism for nodes that facilitate the upkeep of the shared database.

Figure 8 Differences between tokens and cryptocurrency.

The Ethereum foundation pioneered and greatly improved token technology. The Ethereum blockchain was designed to host smart contracts, and these are well suited for creating tokens. A smart contract is code that executes within a blockchain. The smart contract code is a series of instructions that dictate how that token works.

There are many types of tokens, and the Ethereum network has many standards based around how these tokens work. The shared standards allow any tokens on Ethereum to be utilized by other applications. Here are two popular token standards:

ERC-20

The ERC-20 token standard is the most popular token on the Ethereum network, and other blockchains have adopted the same rule set for their tokens. One of the driving factors for its popularity was that the ERC-20 tokens were used for crowdfunding. These funding events were called initial coin offering (ICO).

ERC-721

The ERC-721 is another popular token standard. It differs from the ERC-20 in that each token is unique. A common use for the ERC-721 is digital collectibles. It allows an issuer to prove uniqueness and transferability of a digital asset while allowing each asset to be unique. Cryptokitties (https://www.cryptokitties.co) was the first ERC-721 implementation.

Introduction to Blockchain Technology

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