When you hear the words ‘blockchain token,’ your mind probably goes straight to cryptocurrency. As such, the phrase ‘token’ can often have negative connotations – and cause executives to stay far away from anything related to it.

While the jury on cryptocurrency is still out, blockchain tokens can be valuable and, in fact, often have nothing to do with cryptocurrency. Here’s your weekly ‘Blockchain, Explained’ piece on what, exactly, a blockchain token is.

What is a blockchain token?

A token represents a set of rules encoded in a smart contract. Each token belongs to a blockchain address. It’s essentially a digital asset that is stored securely on the blockchain.

Tokens are most often known to be cryptocurrencies such as Bitcoin or Ether tokens.

However, they can be anything from votes to licenses to ownership of a song.

application tokens diagram

Source: Blockchainhub Berlin

Tokens, as in the image above, are merely assets or access rights (or both). They grant permission and/or ownership to a user. They are a key part of how blockchain technology works.

Another distinction is that tokens are always created on existing blockchains.

So, tokens aren’t cryptocurrencies?

Tokens can be forms of cryptocurrency, such as Bitcoin or Ethereum. There are also stablecoin tokens, which are ‘cryptocurrencies’ that are backed by a real-world asset.

However, tokens often have nothing to do with crypto. A cryptocurrency unit is a token that is secured by cryptography – a token is not a cryptocurrency. A token merely means an asset that can be utilised by the user.

This means that the word ‘blockchain token’ doesn’t need to fill you with fear. It probably has nothing to do with crypto at all. Blockchain has spent many years trying to shed its Bitcoin reputation, yet it is a very valuable asset even outside of crypto.

A cryptocurrency coin is merely a coin and a form of currency. A token has much wider functionality.

To put it simply: look at Bitcoin. Bitcoin tokens can only be used as coins. They are a form of monetary value. Bitcoins have no value outside of finance.

Ether, on the other hand, can be used as a coin but also has other uses. Many blockchain companies use Ethereum for other uses outside of cryptocurrency. ERC-20 tokens can serve different purposes.

So, next time you hear the word ‘token’, don’t immediately shoot it down because you don’t want to be involved with crypto – it might have nothing to do with cryptocurrency at all.

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