What is a token?

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What is a token?

In the context of DLT systems, a token refers to a digital representation of something on a ledger that is exclusive to an owner and can thus change ownership. Because of this exclusivity, tokens are a useful medium of exchange, and people can use tokens to represent rights to something, which provides the token with perceived value. Many tokens are considered digital assets.

For example, the token Ether (ETH) provides its owner a means to pay gas fees on Ethereum. Likewise, the stablecoin token USD Coin (USDC) provides its owner the right to redeem USDC for US dollars held by the company Circle.

Properties that enhance the usefulness of tokens as a medium of exchange include:

Divisibility - a single token may be subdivided into very small units.

Scarcity - there may be a fixed or controlled supply of the token.

Durability - a token cannot be incorrectly destroyed - this is derived from the security and immutability of DLTs.

Portability - the token can be easily transferred or accessed.

Some other interesting properties of tokens include whether it is:

Fungible or non-fungible

Fungible - which is when the different units of a particular token are the same, and thus, it makes no difference if someone owns one unit or another: a unit is the same as any other unit. Fungible tokens can therefore be exchanged with other units of the same token without difference. Bitcoin is an example of a fungible token.

Non-fungible (NFT) - which is when each token carries some unique property. A unit is therefore not the same as any other unit. It makes a difference if I own one unit vs. another unit. CryptoKitties are an example of an NFT, as each CryptoKitty is different from another.

Native or non-native

Native tokens are when a token is an integral part of the operation of the network protocol it is issued on, and they are created at the network’s genesis. Native tokens are often used to pay transaction fees or stake in DPoS systems. Therefore, they are often considered a proxy for the value of the ecosystem the network represents. Ether (ETH) on Ethereum is an example of a native token. 

Non-native tokens are when a token does not meet the criteria outlined above. These are tokens issued on a network after the fact for a variety of purposes, like wrapped tokens, application utility tokens, governance tokens, or stablecoins. Wrapped Bitcoin (wBTC) on the Ethereum blockchain is an example of a non-native token. 

Further reading: