Ethereum is a platform on which applications can run. Ether is the cryptocurrency used as a fuel for executing transactions and applications, and a smart contract is one such application. One or more smart contracts together is called a dapp.
There is a special kind of smart contract that really fuels the creativity of developers and companies: the Ethereum token (“token” for short). A token is created from a smart contract that simulates all expected properties of a digital money. For example, you can have a number of them (balance), you can send, receive and trade them, you can set rules regarding inflation and deflation, and so on.
In essence, it is relatively easy to create your own digital currency. You can set the rules yourself, come up with the name, and use the Ethereum platform. For whatever purpose. You can imagine that there is a growing ecosystem of such tokens.
The best tokens are more than just a means of payment. They are often used as fuel for an application, just as Ether is for the Ethereum platform. This gives them intrinsic value.
Is it a token or a coin?
The words token and coin (the English coin) are often used interchangeably. Usually, both words simply refer to a means of payment. Because a token simulates the properties of digital money, that is not surprising.
However, technically there are differences. The main difference is that a coin has its own blockchain, and a token only uses a blockchain. For example, with a coin the emphasis is more on the integrity of the transactions, and that of a token on its function in the application for which it was introduced.
In daily practice, this difference is not so relevant. Tokens are traded just like coins, and at first glance you won’t see any difference. There are those who are convinced that coins have a more stable value than tokens, but opinions are divided on that.
Why are tokens important?
We previously wrote that tokens are typically used as “fuel” for blockchain applications. That is not very concrete, and that is because the applications are endless. At its core, a token provides financial incentives for users of an application. And when users feel that they are invested in something, they are more involved in the products they use.
You usually see this increased involvement in communities that arise around products that use digital money. People actively participate in the community, are involved in the developments, and provide project management with feedback on all aspects of business operations. Typically things that are difficult to achieve for products without digital money.
Two types of tokens
In general, tokens are used in two ways, and you can distinguish between two types of tokens:
- Usage tokens: a token that you must have in your possession to use a certain service.
- Work tokens: a token that gives you the right to work in an organization, and to earn money from the work you provide. For example, you can supply computing power to an organization and earn money with the work you have delivered.
These two types are not mutually exclusive – there are tokens that do both tasks.
And last but not least
Here you can find a list of the most important Ethereum tokens. You can view a list sorted by market capitalization, trading volume, or by organization. In the next article, we’ll take a closer look at how tokens are used.