Understanding Cryptocurrency Tokens, ERC-20 Tokens, and Tokenization in Cryptocurrency and in General
The term “token” has a few different meanings in cryptocurrency and in general. We explain the general meaning and describe how tokens work with payment systems and with cryptocurrency specifically. [1] [2] [3] [4]
Short answer: In cryptocurrency, “token” is often used as a synonym for “cryptocurrency.” Often the two terms are combined and the term “cryptocurrency token” is used. Consider, the unit of account on the Bitcoin blockchain is the Bitcoin token, and the united of account on the Ethereum blockchain is the Ethereum token. Cryptocurrencies exist as tokenized data (a type of encrypted data used in both cryptocurrency and computer security in general), therefore cryptocurrencies are often called tokens. That said, sometimes people use the term token to specifically refer to a digital asset that exists on another cryptocurrency’s blockchain (for example OMG is an ERC-20 token on the Ethereum blockchain). With all that covered, a token is just a string of numbers and letters used in types of cryptography like computer security (for example the type of security underlying cryptocurrency technology). Given the many ways tokens related to cryptocurrency, there is a lot to cover below for a full explanation. What Does the Term “Token” Mean in Cryptocurrency?
Generally speaking, a token is a stand-in for something else. That is true in both cryptocurrency and computer security.
In computer security and cryptocurrency, the term token is generally referring to a cryptographic string of numbers and letters that contains no real data but relates back to real data (that cryptographic code is a “stand-in” for real data). In computer security, this type of token can be called a “security token” (not to be confused with tokenized securities).
In cryptocurrency, more than one aspect of a transaction exists as “tokenized data.” A token might looks something like this: 947153d332beaf39dec6ebae8883bfb84eda47abccccbc2d61436d8d1e81584d.
In cryptocurrency, the term token can be generally referring to either any given “cryptocurrency token” (ex. BTC, ETH, LTC, etc) or it can be referring to a token that exist on another cryptocurrency’s blockchain (ex. ICOtokens on the Ethereum blockchain).
When no other context is given, when discussing cryptocurrency, one should generally assume the term “token” is being used as a synonym for “a cryptocurrency.”
Meanwhile, when “token” is being used to describe a specific type of cryptocurrency, then one should assume it is referring to a crypto that exists on another cryptocurrency’s blockchain like Ethereum’s.
Meanwhile, when discussing computer encryption or computer security, one should assume token describes a string of numbers and letters used in encryption and not a “value token” like Bitcoin (the Bitcoin token is a stand-in for value, just like money is).
With all that in mind, the short answer as to why all the above and more is true is because cryptocurrencies are value tokens that mostly exist as tokenized transaction data stored on blockchains.
In short, a cryptocurrency meant to be used as money relates to the term token in more ways than one.
That is the gist of everything the average person needs to know about tokens, the rest of the page is really about adding detail and clarity to the above.
Did you know? Not only can you tokenize money, for example the Bitcoin token is an example of this, but you can tokenize almost anything. For example, you create a token that represents a piece of real estate or a stock, and then you can trade that token using technologies behind cryptocurrencies (like blockchains and smart contracts). Different Ways the Term Token is Used in Cryptocurrency
With those general points in mind, the term “token” is used a few different ways in cryptocurrency (some noted above, some not noted yet).
In cryptocurrency:
Summary
In summary, tokens can be value tokens (tokens like Bitcoin), security tokens (tokens used for computer security), or utility tokens (tokens that have use values not just exchange values). In all cases we are talking about a cryptographic string of numbers of letters and the difference between value tokens, security tokens, and utility tokens is found in what the token is used for.
Semantically, in terms of discussing cryptocurrency in general, the term “token” is typically either 1. used to describe any cryptocurrency or a unit of value of a cryptocurrency or 2. used to describe ICO tokens, especially tokens on a network like Ethereum’s. I.e. “token” is synonymous with “cryptocurrency” or “cryptocurrency token.”
Meanwhile, in cases where encryption is being discussed directly, the term “token” generally is referring to an encrypted string being used as something other than a cryptocurrency.
In other words, the term “token” generally means a bunch of different things in cryptocurrency, but can mean any of the above in specific contexts.
The reality is in cryptocurrency one could be discussing any of the above due to tokenization being at the heart of so many aspects of cryptocurrency. Still, if someone says the word token in cryptocurrency… you can generally assume they are using it as a placeholder for “cryptocurrency token.”
Long answer: Not only does “token” refer to both a cryptocurrency token or a token like ETH specifically, it is also relates to the way crypto works, computer security, and a theory of how money works. In short, it is a simple term that is chalk full of meaning and thus one has to pay attention to the context in which the term is used… especially when discussing cryptocurrency as it relates to economics and computer security. Tokens in General and in Cryptocurrency
For the first part of the page we focused on how everything applied to cryptocurrency and discussed encryption a little bit, below we will focus on how tokenization is used in cryptocurrency.
The concept of the term token in general: Generally speaking, the term “token” describes something that is a stand-in for something else.
The concept of the term token in cryptography: A token is an encrypted string that relates back to data. Tokenization is simply a type of encryption (a type used liberally in cryptocurrency technology).
