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What is a token and why would I need one?
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The word “token” originates in the ancient English “tācen”, which means a sign or a symbol. Tokens are widely used to address special‐purpose privately owned coin‐like items of a small value. Recently, “tokens” specified in the realm of blockchains (BCs) redefined the term “token” to abstract any kind of currency (Payment Tokens), resource (Asset Tokens), or access rights (Utility Tokens).3 “Token” or “Cryptocurrency Token” is a data item specified in the language of communication protocols and advanced cryptographic standards.

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Sometimes, the token refers to a carefully designed asset, which is embedded in another blockchain or1 currency.2 However, the term could also be used in a more general framework describing any digital resource, such as Bitcoin (BTC) or Ether (ETH) that can be referred to as cryptocurrency tokens. Moreover, a token is often employed to express the unit of the BC currency. For example: Alice has 5 Bitcoin tokens. This make sense, because similarly to fiat currencies, such as the Swiss franc (CHF) for example, tokens are valuable chips representing some value that do not hold any intrinsic value whatsoever. Furthermore, the term token also originates in that fact that holding, transferring, and generating crypto-currencies relies on specifically formatted strings composed of letters or numbers called tokens, in which tokenization links to the encryption process used to manage crypto‐currencies. When a BC transaction is executed, a newly created token is sent through the Internet and eventually becomes part of the blockchain or distributed ledger.

Virtual currencies are obviously the most straight‐forward use‐cases for tokens. However, tokens can also materialize other use‐cases as well, such as resource ownership, access rights, or voting. The subsequent list illustrates various use‐cases for tokens.

  • Currency Token represents a unit of the cryptocurrency; the value of the token with respect to the fiat currencies is established through regular trading using cryptocurrency exchange facilities.3
  • Access token is related to accessing a physical or virtual property. The user presenting an access token can pass the authentication and authorization procedure and is granted with access to various resources. For example, access to a web service, hotel rooms, Internet of Things (IoT) infrastructure can be performed using access tokens.
  • Asset Token proves the ownership of an asset. It might be linked to intrinsic, extrinsic, tangible, or intangible properties of a given asset. Examples of assets considered are natural resources, precious metals, real‐estate.
  • Certification token might be issued by a certification authority or another organization of an established reputation as an attestation (e.g., marriage certificate, university degree).
  • Collection Token can represent an ownership of a digital collection or collectable items. As an example, “Cryptopunks” are a Collection Token established on the Ethereum network having 10,000 uniquely generated characters that can be owned by different users.
  • Equity token governs equities in digital organizations to perform several vital functions in an organization; a token may handle voting rights, access rights, and resource ownership in a legal entity being a company or Decentralized Autonomous Organization (DAO). Equity chips are equivalent to shares and are responsible for the management of the ownership in an entity. They may have different responsibilities. Some shares can be of limited use having only non‐voting rights related to the distribution of profits and dividends. On the other hand, equity shares can also materialize voting in a decentralized, self‐governing organization, in which the management of the distributed organization is based on the collective decision of voting token holders.
  • Identity Token represents the digital identity of a person. It can be both a purely virtual identifier such as an avatar or a legal entity such as a digital representation of the national identity card.
  • Resource Token proves the ownership of the resources acquired in resource sharing environment or shared economy. As an example, it might be related to the amount of CPU granted to the user presenting a given resource token.
  • Vote Token represents the user voting rights in a given virtual system.
  • Utility token can be used to access or receive a service in exchange of the utility token. There are certain utilities that require its users to possess a token to access an application, service, or a resource. The utility tokens are not traded in the same way as cryptographic currencies on the open market. Typically, they can be acquired directly from the company selling rights to a given service.

Often, a single token provides several of the aforementioned functions at the same time. Therefore, sometimes it is hard to distinguish between different token flavors. This distinguishes “virtual” tokens from their “physical” counterparts, while the physical equivalents have always been inextricably linked to one function.

ERC‐20 Tokens4: “Token” has another meaning in cryptocurrencies specifically. People often use the term “token” to describe Altcoins that exist on another coin platform instead of providing their own BC. Ethereum and NEO host many tokens of this type and other platforms host Altcoins as well. On the Ethereum platform, a “token” would refer to any ERC‐20 token using Ethereum other than the native Ether token. Similarly, on the NEO platform, any NEO‐based token that is not NEO itself would be considered an Altcoin.

Typically, two tokens can be swapped without difference in value and can be used for the same purpose. A new genre of non‐fungible tokens represent a unique item meaning that two tokens of the same kind are, therefore, not interchangeable.1 They are usually tagged with a serial number or other type of unique identifier that distinguishes tokens of the same type from one another.

On one hand, tokens hold digital assets are considered intrinsic to the blockchain itself. Digital items are then governed by the blockchain’s consensus rules, just like the tokens themselves. This also means that such tokens have no real‐world risk associated with the digital asset, while there is a realworld item behind a given token, and the intrinsic asset is, therefore, available through digital channels.

On the other hand, many tokens represent extrinsic assets corresponding to gold bars, real estate, trademarks. The ownership of such items that do not reside in the blockchain has to be governed by laws and policies, which are not part of the consensus rules within the blockchain itself. This means that token issuers and owners will still depend on the regular legal systems. The extrinsic assets hold an external risk, because they are held by external registers, which are often managed by laws and policies that might not be known to contracting parties operating in the blockchain environment. A solution converting extrinsic assets into intrinsic assets and thereby removing, the counterpart risk is one of the most important implications of blockchain‐based tokens. A good example would be to replace the corporate (extrinsic) capital voting rights against DAO or equivalent (intrinsic)‐based equity or voting tokens.

Beyond that, regulatory institutes active in the area of finance, such as the Swiss Financial Market Supervisory Authority (FINMA) define the Tokenization in the context of BC, DL, and cryptocurrencies as a process, which converts the rights to an asset into a digital or digitized token, which is stored and managed on the BC or DL. Typically, a “value” is associated with such a token, which, however, depends in contrast to the technical process of the tokenization on the ecosystem in which the token exists and potentially may be traded. While defining tokens as “Utility Token” which provides access digitally to an application or service by means of a blockchain. The application or service is executed on a BC or DL. “Asset Token” which represents digital assets such as (a) a debt or (b) an equity claim on the token issuer. E.g., they promise a share in future company earnings or future capital flows – analog to equities, bonds, or derivatives. “Payment Token” which is used (a) as a means of payment to acquire goods and services, or (b) as a way to transfer value. A synonym to Payment Token is “cryptocurrency”, thus, a dedicated “coin”, which give rise to no claims on their issuer.5

1What  is  a  Cryptocurrency  Token?  URL:  https://cryptocurrencyfacts.com/what‐is‐acryptocurrency‐token/, last visit October 31, 2019. 
2What Is An ICO Token And How Does It work? URL: https://cointelegraph.com/ico‐101/what‐isan‐ico‐token‐and‐how‐does‐it‐work, last visit October 31, 2019. 
3Andreas M. Antonopoulos, Gavin Wood: Mastering Ethereum: Building Smart Contracts and  DApps; O’Reilly, Newton, Massachusetts, U.S.A. 2018. 
4ERC20 Tokens List, https://eidoo.io/erc20‐tokens‐list, last visit November 6, 2019. 
5FINMA  Defines  ICO  Guidelines,  https://www.finma.ch/en/news/2018/02/20180216‐mm‐icowegleitung/, last visit November 25, 2019. 
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