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Olga Zeveleva
December 2017.
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Why do we need tokens in blockchain technology?

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To put it simply, there are four main types of tokens that carry out various functions in blockchain technology:


1. Tokens backed up by assets from the material world

This category of tokens guarantee the rights of their owners in relation to objects of the material world. These objects can include rights to property, jewels and precious metals, intellectual property, or any other kind of traditional asset.

2. Tokens that certify rights in the material world

These tokens certify the right to get issuers to perform certain actions. Normally these tokens are used as securities that guarantee certain rights to their owners, like in the case of shareholders in a company (who might have a right to vote, or a right to part of the profit, etc).

For example, the token Primalbase allows the owner to use a space in one of the offices that the company plans to build using the money they gather.

3. Tokens that certify rights within decentralised platforms

These tokens are known as protocol tokens or intrinsic tokens. Their main characteristic is that they certify a certain right or an asset inside the blockchain platform itself. At the same time, all aspects of the work of such a token (mining, use, selling, etc) are listen in the protocol of the platform, and this protocol cannot be altered.

For example, ether from the Ethereum system is used for the work of smart contracts. The token Filecoin allows you to securely store data on hard drives of thousands of computers due to its decentralised system and encryption, which is an alternative to storing data in a cloud belonging to one provider.

4. Cryptocurrecy

Cryptocurrency by itself does not bestow any rights on those who own it, and has intrinsic value.

Tokens are used very differently in different cryptocurrencies.

Here is a real-world example: if I give you a pound coin, it is a token. We just call it a pound because that is the currency used in the UK. Some currency authors, to avoid confusion with currencies, will use the word “token” instead of “coin”. It’s just a medium of exchange.

What tokens mean for the blockchain depends on the system you are using them in. If it’s a currency, then it’s a coin that is traded. If it’s something like an energy trading scheme, then it could be something like a kilowatt hour of energy. So you need tokens to exchange information between parties.