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What Are Tokens And Why Buy Them?

February 24, 2023
min. read

In order to understand what tokens are, let's look around and see what assets surround us. First and foremost, it is money. Money is a universal payment instrument that everyone is accustomed to. Money used to be backed with gold, but later it turned out to be absolutely unnecessary, so today the value of money is very ephemeral and is determined by the level of public trust. This trust is based on two things: first of all, money is accepted for payment everywhere; secondly, inflation, that is, a decrease in the purchasing power of money due to price increases generally does not pose a threat in strong economies (even though it’s annoying ).

In addition to money, we use other assets that have a certain value. For example, subway tokens, various bonuses credited to customer cards as part of loyalty programs, airline gift miles, casino chips, certificates for buying something in retail, and even non-alcoholic beer giveaway near the subway stop. However, it's impossible to spend these assets outside of their specific system. We can't use casino chips to pay for a taxi or spend air miles on a train, they won't sell us mineral water for a  cosmetics chain gift certificate, and we can hardly exchange that free non-alcoholic beer for a chocolate bar at a store.

Conditionally, such assets can be called "physical" tokens, and we can use them as examples of a "digital token." From here on, by the word "token" we will mean assets that exist exclusively online. While everything is clear with subway tokens from the legislation viewpoint, the huge number of digital tokens that have appeared in recent years still puzzles legislators in most countries.

If subway tokens existed only as of program code, they could well be called digital tokens. A subway token can be gifted, forged, destroyed, bent in half, but its main property and purpose is that regardless of its price, they can only be used to pay for subway travel. Tokens are not money, but they have value, which means they can be a means of saving.

Since tokens claim to add investment attractiveness, let's first imagine a hypothetical situation of taking subway tokens public, and their price on the stock exchange going sky-high due to limited supply and the wave of speculation and hype demand. You can fantasize about how the ”issuer," namely, the subway emits more tokens in order to funnel them into the system and bring down the price, but the growing bubble stubbornly grows until some large holder (a ”whale") decides that he has earned enough and provokes a "big short".

Let's try to compare tokens with stocks. As they enter the stock exchange, companies are incorporated at the IPO, shareholders receive ownership of shares, free-floats are traded on the stock exchange, and their value is justified by fundamental and market reasons. During the IPO, the company attracts money from the external market, receives capital, and transfers its shares in return. Relying on the results of the company's operations, investors rightly expect that the company will grow, earn more, and its shares will become more expensive. In addition, dividends on shares may be paid out 1-2 times a year.

Similarly, tokens are issued at the ICO. Neither stocks nor tokens are a means of payment, but can be used to save, invest, and diversify savings. The value of tokens, just as the value of shares, directly depends on the company that issued them, its sphere of activity, reliability, and many other factors. As a result, these factors add up to a sufficient level of confidence for an asset to become popular on the market and increase in price.

A digital token is a phenomenon of the Web3 digital world; it is an asset that exists in the form of program code. The subway token can be put in your pocket, company shares are stored in a bank depository, but the token cannot be picked up, placed under your pillow, and you can’t visually make sure that everything is fine with it. Digital tokens appeared primarily because of the emergence of blockchain technology. Prior to that, there were no technologies capable of ensuring such a high level of security of digital assets and trust in them. In simple terms, the blockchain excludes the possibility of altering the information entered earlier. Everything that happens to digital tokens remains in their history forever. Their register (accounting) is preserved in real time and cannot be changed, which is sufficient for these assets to be owned and managed, and everything we own and manage is our property. The level of trust in the security of digital property, regardless of its value, is provided by the blockchain.

Today, there are tens of thousands of different tokens in the digital world, just as there are billions of objects in the physical world, the value of which can be both high and ambiguous. The value of a token, like the value of a stock, depends on its purpose, on the quality of the system it is supposed to function in, on the reliability of the company that created this system, its development goals and growth potential.

Tokens backed by real assets have the greatest value. In this case, the token is a reflection of a real asset in the digital world, and we can talk about the "tokenization" of the asset. For example, you can tokenize subway tokens and start accepting fare payments not only in physical tokens, but also in digital tokens, for example, by using QR codes. Will there be a difference in value between physical and digital tokens? No, as long as the payment system is working. Even if all the physical tokens are withdrawn from circulation and sent to the bank for safekeeping as a security measure, digital tokens will remain in place and will function properly.

Imagine a company that mines gold and tokenizes it. Owners of their tokens may be able to receive rewards similar to dividends on shares of gold mining companies, buy their jewelry products with significant discounts, participate in loyalty programs, etc. If the tokens of such an attractive company start trading on the stock exchange, their value can rapidly grow hundred-fold.

Not only gold is tokenized these days - it can be almost anything else, besides, there may not always be a specific asset behind the token at all. It may be just a trophy in a computer game that allows you to buy a second life or a grenade launcher. Or a reward for a repost on social media: by accumulating such tokens, you can buy yourself likes or pay for advertising your own profile. Tokens penetrate all aspects of our life, and their influence will be increasingly strengthened.

Finally, let’s mention the latest and most complex token type - tokenized hashrate. In the wake of the cryptocurrency hype, many people want to try mining. “How to mine Bitcoin” is one of the most common search engine queries. Mining is a complex event associated with the purchase of expensive equipment, its connection, configuration and operation. Not everyone can afford to dive deep into this process. But thanks to tokens, everything can be easier.

Today, mining power tokenization enables holders of respective tokens to receive rewards in Bitcoin, as if they had mined them. Owning the tokens of a gold mining company would be equal to extracting tokenized gold, which has the same value as a physical ingot. In the case of tokenized hashrate (mining power, hashpower), you can receive Bitcoins without creating a physical mining farm - all you need to do is purchase the appropriate tokens and create a wallet to receive regular rewards.

Digital tokens are an integral part of the modern world, which is already difficult to imagine without them. State regulation of digital assets is at the very beginning of the road, and this industry is slated to develop, penetrate every sphere, and make people's lives more comfortable and eventful. A clear understanding of what tokens are and the right attitude towards them will help you make reasonable decisions when choosing digital assets, manage them effectively, and promote scientific and technological progress, which, as you know, cannot be stopped. Just as history knows no “ifs”, and no changes can be made to the blockchain retroactively.

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