Tokens are a representation of a particular asset or utility, that usually resides on top of a blockchain. Tokens can represent basically any assets that are fungible and tradeable, from commodities to loyalty points to even other cryptocurrencies!
Creating tokens is a much easier process as you do not have to modify the codes from a particular protocol or create a blockchain from scratch. All you have to do is follow a standard template on the blockchain – such as on the Ethereum or Waves platform – that allows you to create your own tokens. This functionality of creating your own tokens is made possible through the use of smart contracts; programmable computer codes that are self-executing and do not need any third-parties to operate.
The main difference between altcoins and tokens is in their structure; altcoins are separate currencies with their own separate blockchain while tokens operate on top of a blockchain that facilitates the creation of decentralized applications.
Utility tokens are simply app coins or user tokens. They enable future access to the products or services offered by a company. Therefore, utility tokens are not created to be an investment.
Just like an electronics dealer might accept orders for a video game that will be released several months later, a startup can create utility tokens and sell digital coupons for the services or products it is developing.
Utility tokens have a use case and are not designed as investments, but that doesn’t mean that they don’t bring any profit. They have a certain use case inside the project and don’t represent company’s share. Utility tokens may grow in price, if the demand for service or product increases. So buying such tokens of a project, that solves real problems of users and is constantly being developed and improved, may give great profit in future.
It is so because utility tokens ought to have some utility in the decentralized application that a team is building and raising Initial Coin Offering.
A security token is a digital asset that derives its value from an external asset that can be traded. The purchase of security tokens are seen as an investment because they represent ownership. Therefore, these tokens are subject to laws that govern securities.
On the other hand, security tokens can offer a vast array of applications if the startup abides by all the regulatory requirements. The most promising of these features is the ability to offer tokens as a digital representation of shares of a company’s stock.
Security tokens are a more recent invention in the crypto space. They are considered by many to be the key to cryptocurrencies achieving mainstream adoption, due to their focus on tokenizing digital and non-digital assets, which makes them useful for almost any industry or application.
The term “Colored Coins” loosely describes a class of methods for representing and managing real-world assets on top of the Bitcoin Blockchain. While originally designed to be a currency, Bitcoin’s scripting language allows storing small amounts of metadata on the blockchain, which can be used to represent asset manipulation instructions. There are several applications to colored coin – Issuing shares, Smart property, Coupon, Community Money, Digital collectibles, Access, and Subscription.
Ethereum is not just a network it can be used as a digital currency system, it is also a platform where other applications can be built. One of the most popular use of Ethereum Network is to create tokens that has moved up the technology stack and can now be issued on the application layer as dApp tokens or DAO tokens. Smart contracts on the Ethereum Blockchain enable the creation of tokens with complex behaviors attached to them.
A digital token may seem difficult to understand and sounds complicated but it is valid since they work as a real actual monetary value. You own tokens by way of a key or series of keys that sanction you to access the tokens themselves. The tokens are not stored on your computer or in some authentic, physical space. They are concepts that designate a categorical amount of money, and you can transfer these conceptions of money to other people or businesses in exchange for goods or accommodations.
The historical perception of money was pristinely developed in the form of an IOU, which was a simple slip of paper. You could leave your gold with a goldsmith, who would inscribe the value of the gold onto an IOU sheet. Then, you could take that sheet with you to purchase goods or accommodations. In turn, when someone wanted to turn that piece of paper back into gold, they would simply have to visit the goldsmith and claim it. Digital tokens work in precisely the same way, without the physical movement of a piece of paper. They enable individuals to purchase goods or accommodations in the online world the same way that money enables people to purchase goods in the authentic world.