What Is a Digital Token?

Written by Anna Komashko
Written by
Investing reporter
ECOS community manager...
6   min.
What is a digital token?

Key Takeaways

  • Digital tokens play diverse roles, serving as currency, utility, and asset tokens, each with distinct functions in blockchain ecosystems.

  • Digital tokens are evolving as a method of payment, with growing acceptance by businesses, indicating a shift in online transaction practices.

  • Users must prioritize security by safeguarding crypto wallets and exercising caution against potential risks like data theft and fraudulent ICOs for a safer digital experience.

No doubt, our world has become more and more digitalized. Blockchain is one of the most exciting and promising achievements of digitalization that garners much attention from Internet communities. And users have numerous questions about the blockchain and its application as this is a new technology and sometimes it is rather difficult to find a correct answer.

Digital tokens were added to our vocabulary not long ago thanks to blockchain. Crypto enthusiasts speak a lot about these assets that are closely connected with cryptocurrency in their minds. But as often happens, real and false facts are mixed together leading to confusion. So what is a digital token? Let’s try to clear it up. Read this short guide to understand the idea of this blockchain phenomenon.

Basics for Newbies

Digital token, crypto token, digital coin, or just “token” or “coin” are often used interchangeably as synonyms though, in fact, they are not absolutely equivalent. But if you are not so blockchain-savvy, that’ll be enough for you to know that all these words often mean just the same in the texts on this topic.

In simple words, digital tokens (and all other words) are digital assets that represent a certain value and can be used for different purposes. They are often compared to plastic casino chips that can be used for gambling but at the same time, they have their own value as they are equivalent to a certain sum of money.

Digital tokens have become a popular way to represent ownership of digital resources. Essentially, a digital token is a unit of value that is created using software and can be used to represent a wide range of assets or services. They can be used for various purposes, such as to track ownership, reward loyalty, or even as a form of payment.

There are two main types of digital tokens: intrinsic and asset-backed. Intrinsic digital tokens, such as Bitcoin and Ether, have value in and of themselves and are not tied to any underlying asset. On the other hand, asset-backed tokens are issued to represent a claim on a specific asset or resource. For example, a digital token could be used to represent ownership in a piece of real estate or a precious metal.

Digital tokens are often used in the context of blockchain technology, where they can be used to track ownership and facilitate secure transactions. They can be created and exchanged easily, making them a popular option for businesses looking to streamline their operations and increase efficiency. With the rise of digital technology, it’s likely that digital tokens will continue to play a significant role in the way we transact and exchange value in the future.

If speaking in terms of cryptocurrency, tokens can be:

  1. intrinsic
  2. asset-backed

Intrinsic (or native, or built-in) tokens are an integral part of a blockchain and fuel its performance. They are not backed by any other asset and their value dependents solely on what someone is eager to pay for it. All of us have heard about BTC on the Bitcoin blockchain or ETH on Ethereum, which are good examples of such tokens.

On the contrary, asset-backed tokens are the digital equivalent of a definite asset like fiat currency (mainly USD or EUR), gold, or various commodities. They have their own value as they are correlated with real-world assets. Namely, USDT is backed by USD, and administrated by Tether.

Tokens’ core functions are a means of exchange, store of value, or a method of payment.

Digital Token
3d illustration. Cartoon character hand sticking out the smart phone screen, throws up golden coins to the air. Online business profit clip art isolated on violet background. Financial application

Digital Tokens as a Method of Payment

Digital tokens can be used for online payments. They are widely used to buy services on their native blockchains. For example, you need to pay ETH if you are going to use the Ethereum network.

Of course, they are also used outside their native platforms though their performance is limited. They are not generally accepted yet and nobody can make businessmen accept cryptocurrencies. But crypto has great potential and the number of online businesses that agree to deal with cryptocurrencies constantly grows.

Today, some advanced market players give us an opportunity to buy various goods with our crypto coins. Shopify gives its merchants the right to accept cryptocurrencies. Overstock also supports such a method of payment. Newegg, Namecheap, Expedia, Reeds Jewelers are among those who keep up with current trends and tendencies in e-commerce.

And of course, various nonprofit organizations accept donations in the form of cryptocurrency.

Main Crypto Token Types

Tokens can perform different functions depending on the purpose of their launch. Here are the types of digital tokens that you can come easily across:

  1. Currency tokens. They work as online analogs of fiat money. They can be used for buying and selling goods, and as a store of value. The basic difference between crypto and digital money is the token’s decentralized nature and the absence of financial intermediaries. In fact, Bitcoin was introduced to replace fiats.
  2. Utility tokens. These tokens provide access to the platform’s services, discounts, and various privileges although it is not entirely guaranteed. They are widely used to facilitate the investment processes in the early stages. ETH is a utility token of Ethereum, OKB is the global utility token of cryptocurrency trading platform OKX.
  3. Asset (investment) tokens. Such types of digital tokens have the primary purpose of being a digital representation of an ownership right in an underlying asset or providing an expectation of income. Bankera’s BNK is a well-known example of such tokens as it gives its holder a right to a weekly commission paid out in ETH.

How do They Work?

As we have already mentioned above, digital tokens are often compared to casino chips. This is a great example that fully reveals the essence of this phenomenon making it absolutely clear. When you enter the casino, you have to get chips to have access to the game. These chips substitute cash money in a casino but they are not money themselves. Though their functions are similar to money, they are not valuable outside this casino (blockchain in the case of tokens.)

The digital token is a kind of medium to introduce real-world payments via decentralized blockchain. The participants don’t need any intermediary layer like banks or other financial institutions to run transactions that are conducted in a faster and safer way.

Where You Can Obtain Digital Tokens

The easiest ways to get selected tokens are to take part in ICO or to buy them on an appropriate exchange.

  1. If you’ve chosen to take part in ICO, just take these five steps:
  2. Register for an ICO via the company’s platform.
  3. Decide on a token you’ll use as payment (usually, Bitcoin or Ether).
  4. Make sure you have these tokens in your wallet.
  5. Purchase ICO tokens by sending your tokens to the company’s wallet address.
  6. Receive ICO digital tokens and store them in your wallet.

If you didn’t participate in ICO for some reason, you can always buy these tokens on a crypto exchange once they are listed there. You’ll still need BTC or ETH to make a purchase as digital tokens are usually traded against Ether and Bitcoin.

How to Use Digital Tokens Safely

Users often are not sure about the safety and security of crypto. Digital tokens circulate online and their overall value is rather high. That is why the users’ desire to protect their assets is quite understandable.

But don’t worry, “hacking” a blockchain is almost impossible. Potentially, someone can do this, but the likelihood of such an event goes to zero if taking the current state of technologies into consideration. It is incredible that someone would be able to hack all the nodes of a decentralized network.

But you should consider the safety of your crypto wallet. This is the main point where most users lose their tokens. Introduce practices to protect yourself against digital fraud or data theft. Ensure that you are the only user of the device you use for crypto activities and never share any of the security codes.

Another thing that can spoil your crypto experience is illegitimate ICOs. A great number of all initial offerings are scams and investors risk their assets participating in a doubtful ICO. That is why protect yourself before making an investment by taking some easy steps: investigate the project’s white paper, study the careers of team members, decide if their goals sound realistic. Make your investment with open eyes and an open mind, and your digital experience will be safe and secure.

The Bottom Line

Digital tokens are no longer something exotic. More and more people get familiar with blockchain, cryptocurrency, cryptowebsites, and exchanges. But though the number of crypto users grows, there are lots of misunderstandings around the crypto world.

If you want to become a conscious member of a crypto community, try to make sure you understand the terms, principles, and concepts of blockchain. This is the key to your successful investments. Enjoy your seamless digital experience and stay up to date with current crypto trends. It is not so difficult if you know what a digital token is.

What is a digital token, and how does it relate to blockchain technology?

A digital token is a digital asset representing value, often associated with blockchain technology. It can be used for various purposes, such as tracking ownership, facilitating transactions, and representing ownership of digital resources. The term is often used interchangeably with crypto token, digital coin, or just “token” in the context of blockchain.

What are the main types of digital tokens, and how do they differ from each other?

There are two main types of digital tokens: intrinsic and asset-backed. Intrinsic tokens, like Bitcoin and Ether, have inherent value and aren’t tied to any underlying asset. Asset-backed tokens represent ownership of a specific asset or resource, such as real estate or precious metals. Understanding these distinctions is crucial for comprehending their roles in the blockchain ecosystem.

How can digital tokens be used as a method of payment, and where are they accepted?

Digital tokens can be used for online payments within their native blockchains. Some online businesses, like Shopify and Overstock, accept cryptocurrencies as a method of payment. Additionally, various nonprofit organizations accept donations in the form of digital tokens. However, wider acceptance is still evolving, and the use of digital tokens for payments is not yet universal.

Where can one obtain digital tokens, and what are the common methods for acquiring them?

Digital tokens can be obtained through participating in Initial Coin Offerings (ICOs) or purchasing them on cryptocurrency exchanges. To participate in an ICO, users typically register on the company’s platform, choose a token for payment (often Bitcoin or Ether), send the tokens to the company’s wallet address, and receive ICO digital tokens. Alternatively, tokens can be bought on crypto exchanges using Bitcoin or Ether.

How can users ensure the safety of their digital tokens and navigate potential risks?

While the likelihood of hacking a blockchain is low, users should prioritize the security of their crypto wallets. It’s essential to follow best practices to protect against digital fraud and data theft, such as ensuring the sole use of the device for crypto activities and avoiding sharing security codes. Users are also cautioned against illegitimate ICOs, emphasizing the importance of researching projects, team members, and goals before making any investment to ensure a safe and secure digital experience.

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