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What the tokens are and why do we need them

06/12/2018 14:20
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What the tokens are and why do we need them

As the cryptocurrency industry develops, more and more people appear willing to work with electronic money. This is one of the reasons why the tokens’ popularity has increased recently. In this article, we will analyze the concept of a token, tell you why and when it can be useful, and study whether you should apply tokens to your business or not.

Meaning of token

A token is an electrical unit that is needed to calculate a cryptocurrency assets balance. In simple words, a token is needed to calculate a cryptocurrency. To work with such coins, the user needs to have a cryptocurrency wallet.

Nevertheless, despite the external similarity, token differs from cryptocurrency in specific factors:

  • Tokens can be emitted both centrally (under the control of a certain company or bank), or decentralized, just like crypto assets.

  • The cost of cryptocurrency is ruled by supply/ demand, news, important political and economic factors. However, token pricing sometimes depends not only on the above factors, but a certain external asset. For instance, the company or a particular platform can create the price for the token and some release rules for the users.

  • Along with the emission, the transactions also can be processed both centrally and decentralized.

Token features

By its definition, tokens look just like cryptocurrency. However, this type of coins has its characteristics, which are very important to consider before you start to work. We will talk about them further.

Firstly, it is important to remember that tokens were created as a part of ICO. After the Ethereum platform launch, the smart contracts appeared to work. Then tokens, as a separate thing, began to develop and used to achieve new goals and attract new followers.

Secondly, a lot of modern tokens are based on the blockchain and have the special ERC20 source code introduced into each coin.

Thirdly, it is important to remember that the token is not a physical asset. Thus, once an investor decides to buy tokens, he acquires a digital asset – just like when he is investing in cryptocurrency. Accordingly, the private keys are acquired to contain data about the number of purchased material resources.

In addition, a lot of new tokens that were created for ICO are based on the Ethereum blockchain. The Ethereum network serves up to several million users, and that fact increases the popularity of the future cryptocurrency. For example, networks like NEM, KickICO, EOS, and Waves are already using this blockchain.

Another one pleasant aspect: you do not need to have an impressive start capital to make your investment. Often, some promising projects offer their users to get tokens for free. To get your coins, you usually need to perform simple steps, such as registering to a project or writing comments for Facebook post.

Tokens types

There are 3 types of electronic coins:

  1. The first one is Equity tokens – coins that are used as a shares of the companies. Such tokens have all the same functions as the traditional company stocks, which are traded on exchanges.

  2. The second type is Utility tokens. As a rule, they are used on a single site or even an online project. Such coins can be used as a payment for users for certain actions they perform on the a platform, like bonuses or game currency (for instance, if we are talking about online games).

  3. In addition, the third type is Asset-based tokens. Such tokens look like obligations for any services or goods. That means that with such a token you can actually pay for a service or product. Accordingly, only these ones can actually be provided with a real, physical equivalent. The type of services or goods will depend on the organization that is providing the tokens.

The main advantages of tokens

The tokens have a lot of advantages for investors. First of all, such coins are universal – because both very large companies and start-up businesses can create and use its’ own coin. In addition, there are the following positive points:

  • The use of tokens allows you to accelerate the purchases very fast. That means that while working with electronic money, people make faster transactions and do not have to deal with physical assets.

  • While working with electronic money, you should not let "third parties" and various intermediaries enter into your business. Now, the smart contracts can take their functions.

  • The ability to increase all the functionality of your business, and expand the capabilities of your platform. For example, here you can connect new work modules, such as multi-level authentication, invoices creation, the ability to make regular payments or use the replenishment cards.

  • The easier work with mobile services. As a rule, it attracts a lot of users who are more comfortable with using a smartphone. Therefore, it is good to update the mobile applications, adding a large number of functions and different features.

  • In addition, if your platform is organized on blockchain basis, it becomes possible to connect several additional advantages. Among these advantages are the database reliability, processing the operations with a large number of independent servers, reliable auditing (the ability to check all the transaction history).

Possible risks of working with tokens

Like any new FinTech and cryptocurrency technology, tokens may have certain difficulties, and you can face ones during the process of use. To protect yourself and your business, inform yourself before facing such problems:

  1. Time after time, the users' risk meeting the hackers. That is why it would be best to make sure your personal information is safe. For example, remember not to transfer access keys to other people.

  2. While working with public blockchain, it is more difficult to ensure good privacy, because all the data should stay open to verify transactions from all the users.

  3. While you use tokens, the scaling becomes more complicated. This happens due to blockchain database limits in bandwidth.

How to buy tokens

There are a lot of possibilities to get electronic coins. Often such process looks like buying cryptocurrencies.

First of all, you can purchase the tokens through online trading services. It can be cryptocurrency exchanges (where you can find the coins that are interesting for you), or conventional cryptocurrency exchangers. This method is good for those who chose tokens that were released a long time ago, and which have already become popular enough to be sold on exchanges and other special services. Here you are buying a complete cryptocurrency. This method is suitable for those who have already decided which type of investment they want to have, and know exactly how to use the coin.

One more way to get a token is to buy it from one person to another. In other words, to make a deal when the seller and the buyer agree to sell the token without exchange services. It is worth saying that this method of acquiring tokens is not very frequent, as there is a high risk of facing fraud. That is why it is more convenient to buy tokens «from the hands» only if you know the seller very well and can trust him or her.

Another way to acquire tokens, which we mentioned earlier, is to participate in the ICO. As a rule, a lot of startups offer the tokens for their new users as a reward for simple actions (for example, adding two-factor authentication, posting videos on YouTube, creating comments for social networks). Thus, you can get tokens for free. However, it is important to remember that contributing to startups is risky as well. After all, if the project fails to become successful, then the benefits of such tokens will be small or zero at all. Buying coins during ICO is a good opportunity for beginner investors – they can invest a small amount while getting an opportunity to earn a profit in the future, once the project gets a successful development.

Where to store tokens

Tokens can be stored on ordinary cryptocurrency wallets. These can be either personal users’ wallets; or special application wallets, that are included to the platform structure.

Cold wallets are the physical devices that look like a regular USB flash drive. You do not need to keep such a wallet connected to the network. You connect your cold wallet only when you use it. Such a device is more suitable for long-term investments. After all, in order to use such a wallet, you will need to attach it to your computer. A cold wallet is more suitable for long and large deposits when you once transfer the money to the wallet and then do not use the device for a while.

Hot wallets are the online services that are designed to work with real-time cryptocurrencies in particular. These services are the opposite of cold wallets. With such a wallet, you can get quick access to your funds at any time that is convenient for you. The hot wallets, in turn, are divided into mobile and desktop. Thus, each user can choose a suitable service for his work.

Mobile wallets, as you can read it from the name, are made for smartphones and tablet computers. Such wallets can be multiplatform (for different operating systems) or monoplatform (just for one OS). For example, some wallets were originally created only for Android:

  1. Bitcoin Wallet;

  2. Airbitz;

  3. Mycelium;

  4. GreenBits;

  5. Breadwallet.

... or for iOS only:

  1. Breadwallet;

  2. Airbitz.

Desktop wallets, in its turn, can be divided into two main types: thick or thin. Thick wallets are those that are downloaded to a computer along with a working blockchain. A thin wallet can be used as the desktop version. However, in this case, all the information about transactions is stored within a third-party server, and the wallet program can address to that server once needed.

The world of cryptocurrency is constantly developing and brings something new, so stay with us and remember to subscribe to our pages in FacebookTelegram news feed channel and YouTube channel to stay in touch about all updates of cryptocurrency world!

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