The cryptocurrency industry is heavily relying on ICO tokens (ICO stands for Initial Coin Offering) to start new businesses. If you’re wondering what is an ICO token we’ll cover that as well as how it works below.
What is an ICO token?
A token is a special kind of entity that represents an asset, utility or service which also gives their value. You can “tokenize” almost anything from products and services to your own work.
You should not mistake tokens for crypto coins. They can use an existing blockchain, unlike cryptocurrency.
While a coin is a type of currency (be it physical or virtual), a token is a symbol of a contract and its value is not linked to mining and other dynamic market factors.
What is a token contract?
While it’s not “money”, a token is used to regulate a transaction and we’ll use Ethereum as a basic example. Here’s how Ethereum’s complete contract cycle looks:
- Token creation – The company establishes the essential rules which include details such as the number of tokens, their value and any conditions that need to be met. From then on, the platform will ensure all transactions will abide by the ruleset.
- Tokens acquisition – Token acquisition is pretty simple but of course, there must still be tokens available and the transaction needs to comply with the platform’s rules.
- Token transaction – If you own tokens then you will also have a token wallet on its platform which will let you transfer them using smart contracts.
Of course, any kind of transaction involving tokens requires resources which are not free. Processing transactions in the crypto industry are also known as “gas”. Whenever you buy or sell tokens you will also need to pay the fee, aka. the “gas”.
Common types of tokens
Utility tokens – Imagine you pay the entrance to a hype club and the price includes two free drinks (which are obviously not free, but hey!). Congratulations! You just bought yourself a utility token.
Depending on how popular that club becomes, it’s tokens might become more expensive over time, so while you will still get those free drinks included, the token might cost you more.
Equity tokens (stocks) – In the crypto world, you can buy equity tokens from an ICO (Initial Coin Offering) which are used by startups that don’t rely on crypto-technology.
The token holders will not only get a fixed or dividend commission, they can also participate in the company’s decision.
Credit tokens – This is practically a loan a holder can give to a startup, which is just another alternative for raising the money needed to support the new business. There’s usually a rule that says how much you will earn besides your money back.
Combo tokens – Sometimes tokens can be of several types at the same time. For example, Sia and Digix are both tokens and stocks. Other platforms might have more than one type of token.
How to trade tokens
Trading tokens require registering an account on an exchange, just like for crypto coins. Nevertheless, there are conditions in most cases which can be pretty tough. There might be date limitations, vendor limitations and so on. For this reason, it’s recommended you read all the information before deciding which tokens you want to invest in.