A token differs from a cryptocurrency in that its function is limited to the framework of the specific platform with which it is associated. As described in a previous guide, a cryptocurrency is a decentralized digital payment solution that enables various parties to transfer funds to one another in a way that is borderless, transparent, and anonymous. It is essentially a digital currency that generally exists independently of any centralized institution of government.
Some countries are planning to develop their own cryptocurrencies, but most countries so far seem to be against the prospect. However, there are some countries considering holding initial coin offerings (ICOs). These often arise due to dire economic situations rather than out of a genuine belief in the potential of cryptocurrencies. Of course, this is interesting as it blurs the line between cryptocurrencies and tokens.
What is a Token?
A token is a digital unit that is used to perform transactions as a form of remuneration within a particular blockchain-based platform. Its value is determined by both the platform, as well as other individuals who perceive the token as having an intrinsic value. This works in the same way as a casino chip. Basically, a casino chip is purchased by the gambler in exchange for its fiat equivalent, for the individual to be able to make use of the services that the casino offers. Players can play whichever game they want to play on with those chips, unless it is a slot machine. However, only that casino’s chips will be accepted in the casino. Similarly, other unaffiliated casinos will not accept this casino’s chips. Players who want to play at different casinos will need to hold the chips that each casino they want to play at accepts.
How do Tokens Work?
If the gambler wishes to use the value represented by their tokens outside of the framework of the casino, they will first need to exchange it for fiat currencies. This can be done either through the cashier at the casino, or by selling them to other players in the casino. This is very similar to an ICO’s token. Their token typically only serves a function within a particular blockchain-platform. The value of that token depends on the usefulness of the platform it is used on. Tokens can be used for:
- In-platform payments and transactions.
- Purchasing platform products or using their services.
- Accessing premium packages and courses on the platform.
- Purchasing products and services from other users on the platforms.
- Incentive rewards for content engagement.
- Participation and contribution rewards (such as for providing reviews and ratings or developing protocols and tools for the platform).
However, while most platforms offer tokens for sale directly, they don’t always offer to buy their own tokens back. The user will need to visit a cryptocurrency exchange to find a buyer for their tokens when they want to cash out. This takes us to a discussion on token value.