What is a token?

1. What is a token?

A token is a unit of accounting that is used to represent a digital balance in some asset. Tokens are accounted for in a database based on blockchain technology, and are accessed through special applications using electronic signature schemes.

2. What types of tokens are there?

  • Equity tokens represent shares of a company.
  • Utility tokens – reflect some value within the business model of an online platform (reputation, points for certain actions, game currency).
  • Asset-backed tokens – digital obligations for real goods or services (kilos of carrots, an hour of construction work, etc.).

3. What can a token be secured with?

Only asset-backed tokens can be directly secured. In this case a token is a digital twin of a real (physical) asset or service. For example, one token can be equivalent to one square meter of living space or the opportunity to go to a single screening at the cinema. The token’s conversion into collateral is guaranteed by the organization itself, which stores the goods or provides the services.

4. What is asset tokenization?

Tokenization is the process of transforming the accounting and management of assets, in which each asset is represented as a digital token. The essence of tokenization is the creation of digital counterparts for real values in order to work with them quickly and securely. For example, a bakery owner creates an electronic accounting system in which he issues digital liabilities for buns – tokens. With a good enough reputation, the bakery owner can pre-sell the buns by selling the tokens on online marketplaces. In that case, any token owner can come to the bakery and exchange one token for one bun.

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5. How is a token different from a cryptocurrency?

Unlike cryptocurrencies, tokens can be issued either centrally (managed by a single entity) or decentralized (managed by a predetermined algorithm). Transactions can also be processed and accepted centrally (all servers are controlled by a single organization). The price of tokens may not only depend on the balance of supply and demand, but also on additional aspects (binding to an external asset, conditional rules of issuance or remuneration). In addition, unlike cryptocurrencies, a token does not have its own blockchain.

6. How to buy tokens?

Tokens can be bought through online trading services (exchanges and exchanges), or in personal transactions (buyer and seller agree in person). The token trading process itself is identical to the cryptocurrency trading process. In addition, token issuers often embed the ability to purchase tokens through traditional electronic means of payment in the web pages of their projects.

7. Where to store tokens?

Tokens are similar to cryptocurrencies in their transfer and storage processes. They use special wallet applications that implement key storage and processing, as well as transaction generation and signing. Typically, these applications are part of the infrastructure of a tokenization platform.

8. What are the benefits of tokenization?

  • Speeds up trading processes, as real assets do not need to be moved and ownership paperwork is not required.
  • Increases the security of storage and transfer through blockchain-based transaction accounting.
  • Eliminates the need to trust intermediaries because their participation can be described at the smart contract level or they can be excluded from the chain.
  • Increases the functionality of the infrastructure, extending the capabilities of the platform by connecting additional modules (multi-level authentication, creation of invoices, regular payments, top-up cards).
  • Increases usability, as many features of the platform can be integrated into the user interface of the mobile application.
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9. What benefits does blockchain bring to the tokenization process?

  • Organizing a reliable database (ensuring that the integrity and validity of the data of each next state of the system is verified).
  • Decentralization of the point of failure (processing and acceptance of a transaction by multiple independent servers).
  • Organization of reliable auditing (full verification of the correctness of the entire history of changes on the platform by an auditor).

10. What are the risks and challenges of tokenization?

  • Users’ private keys can be lost or stolen by hackers, which cannot be predicted or insured.
  • Ensuring privacy in public blockchains is a challenge because the data must be exposed for the transaction verification process.
  • Scaling in a decentralized accounting system is challenging because the decentralized database has a strict bandwidth limitation.

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