The word “token” originates in the ancient English “tācen”, which means a sign or a symbol. Tokens are widely used to address special‐purpose privately owned coin‐like items of a small value. Recently, “tokens” specified in the realm of blockchains (BCs) redefined the term “token” to abstract any kind of currency (Payment Tokens), resource (Asset Tokens), or access rights (Utility Tokens).
Sometimes, the token refers to a carefully designed asset, which is embedded in another blockchain or1 currency.
Virtual currencies are obviously the most straight‐forward use‐cases for tokens. However, tokens can also materialize other use‐cases as well, such as resource ownership, access rights, or voting. The subsequent list illustrates various use‐cases for tokens.
Often, a single token provides several of the aforementioned functions at the same time. Therefore, sometimes it is hard to distinguish between different token flavors. This distinguishes “virtual” tokens from their “physical” counterparts, while the physical equivalents have always been inextricably linked to one function.
ERC‐20 Tokens4: “Token” has another meaning in cryptocurrencies specifically. People often use the term “token” to describe Altcoins that exist on another coin platform instead of providing their own BC. Ethereum and NEO host many tokens of this type and other platforms host Altcoins as well. On the Ethereum platform, a “token” would refer to any ERC‐20 token using Ethereum other than the native Ether token. Similarly, on the NEO platform, any NEO‐based token that is not NEO itself would be considered an Altcoin.
Typically, two tokens can be swapped without difference in value and can be used for the same purpose. A new genre of non‐fungible tokens represent a unique item meaning that two tokens of the same kind are, therefore, not interchangeable.
On one hand, tokens hold digital assets are considered intrinsic to the blockchain itself. Digital items are then governed by the blockchain’s consensus rules, just like the tokens themselves. This also means that such tokens have no real‐world risk associated with the digital asset, while there is a realworld item behind a given token, and the intrinsic asset is, therefore, available through digital channels.
On the other hand, many tokens represent extrinsic assets corresponding to gold bars, real estate, trademarks. The ownership of such items that do not reside in the blockchain has to be governed by laws and policies, which are not part of the consensus rules within the blockchain itself. This means that token issuers and owners will still depend on the regular legal systems. The extrinsic assets hold an external risk, because they are held by external registers, which are often managed by laws and policies that might not be known to contracting parties operating in the blockchain environment. A solution converting extrinsic assets into intrinsic assets and thereby removing, the counterpart risk is one of the most important implications of blockchain‐based tokens. A good example would be to replace the corporate (extrinsic) capital voting rights against DAO or equivalent (intrinsic)‐based equity or voting tokens.
Beyond that, regulatory institutes active in the area of finance, such as the Swiss Financial Market Supervisory Authority (FINMA) define the Tokenization in the context of BC, DL, and cryptocurrencies as a process, which converts the rights to an asset into a digital or digitized token, which is stored and managed on the BC or DL. Typically, a “value” is associated with such a token, which, however, depends in contrast to the technical process of the tokenization on the ecosystem in which the token exists and potentially may be traded. While defining tokens as “Utility Token” which provides access digitally to an application or service by means of a blockchain. The application or service is executed on a BC or DL. “Asset Token” which represents digital assets such as (a) a debt or (b) an equity claim on the token issuer. E.g., they promise a share in future company earnings or future capital flows – analog to equities, bonds, or derivatives. “Payment Token” which is used (a) as a means of payment to acquire goods and services, or (b) as a way to transfer value. A synonym to Payment Token is “cryptocurrency”, thus, a dedicated “coin”, which give rise to no claims on their issuer.