Tokens are digital assets representing a user’s right to use a system/service/application or to participate in a process based on blockchain.
Tokens are similar to cryptocurrencies in terms of issuance and distribution, but they are different in terms of value. A cryptocurrency can be used as a medium of exchange, while a token has value only utility or security value.
Tokens are mainly of two types — utility tokens and security tokens.
Utility tokens are used to represent a user’s right to use a decentralized application. In general, to make sure that the DApp developers are paid for their work, utility tokens are used as a paywall for using DApps. The users have to purchase tokens for an app in order to use it. The value of utility tokens is based on the actual utility and popularity of the underlying DApp.
Security tokens don’t have a utility associated with them, but they are seen more as an investment into a project to make profits. When the market value (users, usage, popularity) of a project or a company increases, the value of securities also increases and the investors can make a profit.
Tokens are created and issued using smart contracts. In token smart contracts, there are specific functions that mint and issue tokens to users. Users can buy the tokens by calling these functions, and by making payments in native cryptocurrency of the blockchain on which the smart contracts are deployed.
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