Growing up I remember often opting to help senior relatives buy soft drinks because they would always be cash promises as compensation for the errand. The soft drink seller, however, will always demand a cash deposit as insurance for the bottle. This made it such that anyone who returns the empty bottle can lay claims on the cash. I look back and realize this was the earliest expression of a token I interacted with.
A token is simply a representation of something else. The item concerned can either be tangible or intangible. To illustrate a tangible token:
Suppose you check into a 5-star hotel and you are handed over a security card. The card granting access to your room is a physical token proving you are approved to access the room.
On the other hand, when you sign up on a platform with your email, a confirmation link is usually sent to your inbox. Upon clicking the link, you are now granted access to the platform. In this case, the link is a digital token that authenticates your access to the email concerned.
The fundamental idea of representing something else as a token has evolved to become the core pillar of crypto (blockchain-based) tokens.
Crypto tokens are digital representations of any item of value stored on a blockchain. These tokens represent scarce digital assets, goods, property rights, ideas, etc. Crypto tokens are digital resources that one can control and reassign control to someone else entirely on the blockchain.
Why do we need Crypto Tokens?
As blockchain technology continues to be integrated into every sphere of human interaction, crypto tokens in like manner have become increasingly important as they serve as the driving factor to facilitate economic transactions in the digital economy.
Digital Money
Crypto tokens like Bitcoin have evolved to be recognized as money. Now, people use them to exchange goods and services, store them as a possible edge against fiat-currency inflation, and as a unit of account to track and record transactions.
Usage Incentives
The main features of many Web3 platforms can only be accessed by users who hold their token, as a way to incentivize its core users with the exclusive benefit the platform provides. This is common in many DAOs and Launchpad platforms like BSCpad, Polkastarter, etc
Accelerating Network Effects
The network effect is achieved when more people join a platform. To achieve this in crypto, protocols often issue their tokens as airdrops for free to their users or as an incentive to attract new users to start using their product.
Access for Governance
The core ethos of blockchain is about the decentralization of power and removal of the middle. men from the system. This is usually achieved by allowing anyone who holds the protocol’s token to participate in the decision-making process that decides developments that should be implemented in the protocol.
Representation of asset ownership
Valuable assets like collectibles, artworks, and music can be represented on the blockchain as NFTs and will confer exclusive rights to the owner until control is transferred to another party.
Profit-sharing
Much like shares of traditional companies, token holders of crypto protocols can earn profit allocations based on their stake in the project and the sharing formula. This helps to encourage people to become long-term token holders.
Funding Instrument
Project teams can issue tokens to raise funds from its private and public sale rounds and utilize funds for developments of its protocol.
Wow this is an eye opener.
Thank you for such explanation.