What Is An ICO Token And How Does It work?
What’s the definition of crypto token?
It's an entity with a value specified by the eminent. If it's a fashion startup, one token can be equal to one dress or a yearly license of a software in case of a hi-tech startup. You even can issue tokens of yourself and a token holder will be able to buy an hour of your work with the token. You can “tokenize” everything.
What’s the difference between cryptocurrency coins and tokens?
This is a difficult part. The easiest answer: tokens are not a currency. You don’t need to create a Blockchain to issue tokens, which is a must-have for a cryptocurrency, but you use an existing one (usually Ethereum, which was originally created as a platform for smart contracts and evolved to be a currency).
A coin is a money equivalent, something that defines value and serves as a value transfer.
A token is a symbol of a contract, the value does not depend on mining, gold price or any dynamic market criteria. A friend of mine once gave me a note saying that he will always make me a coffee on demand. He still does it, after 10 years, it was a heck good token!
What is a token contract and how does it work?
Ok, a token is not a coin, got it. But still, something should regulate it’s transaction, value etc? How does that work? You do need a platform for it. Let’s take Etherium as an example, since its one of the most popular platforms for smart tokens.
Here is the full contract cycle:
- Tokens creation: a company writes the basic rules (tokens amount, token value, special conditions). Once created the platform will serve as a very smart notary for all the future transactions, making sure all the conditions are carried out.
- Tokens acquisition: when somebody wants to buy a token, the process is really similar to buying a coke in a vending machine. You approach a machine, drop the coin and push the button “coke” (choose the token you want to buy). The machine checks if there are “cokes” in stock and if you are eligible to buy it. If everything is fine- you get your drink (or token in our case). The machine says “have a nice day” and updates the stock info (one coke less now).
- Token transaction: In case you have a coke, you can just pass it to your friend. For money or for free. In tokens reality, you have your token wallet which is supported by the same platform that issued the token. You can transfer your token using the wallet. And again, a virtual notary, powered by a smart contract, will make sure you do it according to the rules. Moreover, all the wallets activity is constantly recorded and being updated.
Is all this free? Nope. Somebody needs to pay for the notary, vending machine technician and coke delivery. In the token world – the operation processing called “gas.” So, each time you ask to buy or sell tokens, there will be some “gas” spent and you will pay its fee.
Note: the fee is not static. It depends on a number of transactions awaiting. You can define the max cap you are willing to pay for your gas. If the token cost is, say, $10 and the gas fee is $20 is not a great deal, isn’t it? So, you can say that you pay no more than $2 for your gas, click “submit” and find something else to do meanwhile. The system will serve the highest gas bids first and eventually yours when your time will come. There is a chance, you will wait for a long time (if others are willing to pay more than you). But you always can rise the gas cap.
Types of tokens
Let’s see the most common types of tokens.
Token – token (Utility tokens), the most popular type
Remember amusements parks from the childhood? Roller coasters, carousels, hot dogs and cotton candy? At the entrance, you’ve got tokens to buy food and enter the attractions.
So, let’s pretend that a company is an amusement park and with the tokens, you can buy different services just as you do with carousels and hot dogs.
Now, to make the analogy perfect, let’s say that you can buy lots of tokens before the park is officially opened, or when it’s just opened. If the park becomes popular, its tokens will be much more expensive. Like $10 for a hot dog. But a smart child who bought the tokens before the opening will still enjoy his meal for $1.
This is basically the idea behind issuing and buying tokens. But if in the amusement park you buy the tokens at the entrance, where do you get a cryptocurrency token?
The answer is ICO – Initial Coin Offering.
Token – stock (Equity tokens)
In this case, ICO is completely equal to IPO. Usually, token-stocks are issued when a startup does not require a crypto-technology.
In this case, token holders will get dividend or fixed commission. They also will be able to take part is the company decisions. All this honor for supporting the project in the beginning of its life.
Token – credit
This is a loan; a holder gives to a startup. It’s another way to rise money. For example, you invest X to get X + 10 percent.
Token – combo
If you are not completely confused, you will be now: sometimes a token can belong to more than one type. For example, tokens Sia and Digix are both tokens and stocks. And Steemit has all the three types of tokens (Steem, Steem Dollars (SBD) and Steem Power (a denomination of VESTS).
How do you trade tokens?
This part is pretty similar to coins. You have to register on an exchange for buying and selling tokens.
The transaction conditions can be really complicated: the contract can include multiple rules like “you can sell it only before a specified date” or “after some date but only for a certain vendor.” So, when investing in tokens, you should read the “small letters” really thoroughly.