What is a token?
Tokens are digital assets issued on top of existing blockchains using smart contracts. Unlike cryptocurrencies, which are native assets of their respective blockchains, tokens do not have their own blockchain and operate within existing network infrastructures. In most cases, transferring tokens requires the native cryptocurrency of the underlying blockchain to pay transaction fees.
From a technical perspective, a token represents a record in a smart contract that reflects ownership rights to a particular digital asset and defines the rules governing its circulation. As a result, tokens may implement virtually any behavior logic specified by program code, most commonly written in programming languages such as Solidity, Rust, and others.
The emergence of tokens marked a critical stage in the evolution of blockchain technologies, transforming blockchains from simple payment systems into universal platforms for the digital economy.
Technical Nature of Tokens
Tokens are created and managed through smart contracts — programs that are automatically executed on the blockchain when predefined conditions are met. A smart contract defines:
- rules for token issuance (minting),
- conditions for transferring tokens between participants,
- mechanisms for destruction (burning),
- additional functions such as voting, reward distribution, asset locking, and others.
Effectively, a token is a programmable digital asset whose behavior is entirely determined by the logic embedded in its smart contract.
To standardize interactions with tokens, specialized token standards were developed, defining mandatory functions and interfaces. The most widely adopted standards include:
- ERC-20 — fungible token standard,
- ERC-721 — non-fungible token (NFT) standard,
- ERC-1155 — hybrid standard combining features of ERC-20 and ERC-721.
These standards allow wallets, exchanges, and decentralized applications to interact with tokens across different projects without requiring custom integration for each new contract.
A key advantage of this architecture is the dramatic reduction of entry barriers: launching a token does not require deploying a new blockchain — it only requires deploying a smart contract on an existing network. In practice, issuing a basic token may take only a few minutes using standardized templates and automated deployment tools.
Economic Nature of Tokens
From an economic perspective, tokens represent a universal instrument of digital economic relations. They can embody virtually any form of value, rights, and obligations.
Depending on the smart contract logic, tokens may function as:
- a medium of exchange within ecosystems,
- a mechanism for accessing digital services,
- a unit of account,
- a financial asset,
- a representation of ownership or participation rights,
- a governance instrument,
- proof of ownership,
- a mechanism for incentivizing users and developers.
Thus, tokens may be interpreted as programmable economic rights existing in digital form and automatically enforced on the blockchain.
Tokens enabled the implementation of complex economic models that were previously infeasible within traditional centralized information systems.
The Role of Tokens in the Development of the Crypto-Economy
While cryptocurrencies laid the foundation for decentralized payment systems, tokens became the key driver of the entire crypto-economy.
The introduction of tokens enabled:
- the development of decentralized finance (DeFi) protocols,
- the creation of non-fungible digital assets (NFTs),
- the formation of decentralized autonomous organizations (DAOs),
- the emergence of blockchain-based gaming and social platforms,
- the tokenization of real-world assets.
Tokens made it possible to embed economic incentives directly into program code, leading to fundamentally new models of interaction among users, developers, and investors.
In essence, tokens transformed blockchains into infrastructure for building decentralized digital economies, where value exchange rules are governed by algorithms rather than centralized institutions.
Main Types of Tokens
The diversity of token functions has led to the emergence of a wide range of token types. The main categories of tokens found in the modern crypto-economy are presented in the table below.
| Token type | Primary purpose |
|---|---|
| Utility | Access to services, functions, and digital products |
| Governance | Protocol governance and participation in decision-making |
| Security | Representation of investment and financial rights |
| Asset-backed | Representation of real-world assets (real estate, commodities, securities, etc.) |
| LP tokens (Liquidity Provider) | Proof of participation in liquidity pools |
| Meme / Social tokens | Social identity, community engagement, and cultural value |
| NFT | Representation of unique digital objects |
Each of these token types has its own economic logic, technical implementation, and regulatory status, which are examined in detail in the following sections of this chapter.
Difference Between Tokens and Cryptocurrencies
Despite superficial similarities, tokens and cryptocurrencies differ fundamentally in their nature and functions.
| Criterion | Cryptocurrency | Token |
|---|---|---|
| Own blockchain | Yes | No |
| Technical foundation | Blockchain protocol | Smart contract |
| Native asset | Yes | No |
| Used for transaction fees | Yes | No |
| Primary function | Supporting network infrastructure | Implementing application logic |
Thus, cryptocurrencies form the infrastructure layer of blockchains, whereas tokens implement the application and economic layers.
Tokens as the Foundation of Modern Blockchain Ecosystems
Most modern blockchain projects are built around tokens. They are used for:
- incentivizing network participation,
- protocol governance,
- capital formation,
- community building,
- coordination of economic activity.
This makes tokens a central component of the Web3 economy, where program code, economic incentives, and social mechanisms converge into a unified digital environment.
The diversity of token functions has led to the emergence of numerous token categories, which are examined in detail in the subsequent sections of this chapter.
Summary
Tokens constitute a fundamental building block of the modern crypto-economy. They are programmable digital assets created through smart contracts on top of existing blockchains.
Due to their flexibility, tokens enable the design of complex economic models, the formation of decentralized markets, and the development of new digital ecosystems. It was precisely tokens that transformed blockchain technology from a payment-focused innovation into a universal platform for decentralized economic systems.