What are Tokens and How can They Benefit Online Transactions?

Digitalization is present on almost every aspect of our lives nowadays. This is bringing us a lot of new technologies that came to revolutionize the way we do our daily tasks, including all types of transactions and exchanges.

What are Tokens?

Tokens are essentially the representation of value assets. Almost any asset in the digitalized form can be represented by a token. They can be invested or exchanged for information, products or services. You can “tokenize” a variety of things, like intellectual property, companies, etc.

These are used and reside in a pre-existing blockchain infrastructures. Unlike cryptocurrencies that are built in the blockchain infrastructure, tokens can be added onto it and are not regulated by the blockchain system itself, but through smart contracts.

Like blockchain itself, tokens are decentralized meaning they’re not dependable on intermediaries when being used in transactions. The records of these are kept safe in the blockchain, where information can’t be altered by anyone without given authorization by the rest of the blockchain members, or by outside manipulation.

How do Tokens work?

Besides their purpose of being a representation of a value assets, tokens can have additional characteristics that make them appropriate to use in certain situations. This means that specific types of tokens must be used for specific actions. Some of the existent types are:

  • Utility Tokens: This type of token is used to have access to a product or a service. For example, it can be used as a form of payment in smart contracts, to exchange for other assets, working as a key for access.
  • Security Tokens: Security Tokens are used in transactions of ownership rights, for investments in enterprises like shares. In this context a token can represent a quantity of shares that you can acquire.
  • Reward Tokens: You can have tokens be distributed through you as rewards. They can be attributed as compensation for specific behaviors, like being a regular user of a platform.

What are the Main Benefits of using Tokens?

“Tokenizing” assets and using these tokens for exchanges and transactions has many benefits. These benefits are strongly associated to tokens being used on blockchain infrastructures. Some of these are:

  • Records: Being on a blockchain, every transaction done using tokens is registered. These records are kept and are immutable, as information can’t be changed without the approval of the majority of the blockchain’s network.
  • Transparency: All the information in the blockchain is decentralized, which allows everyone inside the network to be able to access the records kept immediately. This provides transparency and also avoids misinformation, as it’s available to everyone.
  • Less Intermediaries: Being on a decentralized system, tokens exchanges or transactions are done through Smart Contracts, which means these processes don’t need any external or internal intermediaries to approve them to go through, like other traditional methods do.
  • Safety: As mentioned before, records and information regarding tokens are immutable, which means they can’t be altered by a singular person or an external threat. Besides that, tokens don’t rely on encryption to protect data, that can be breakable and reversible. Instead, tokenization systems generate random data that has no direct relation to the token, which makes it unreversible and makes accessing this data harder. The sensitive data is mapped and kept by the service provider and can only be accessed through them.

To learn more about the benefits of using blockchain infrastructures, check the following article: What is Blockchain: An Introduction to this System

Leave a Comment