A token is a digital asset that exists on a blockchain network, typically representing a fungible and tradable good, service, or asset. Tokenization is the process of representing traditional physical assets or services on a blockchain as digital tokens. Typically, this process is used to digitize assets such as real estate, commodities, stocks, or other financial instruments.
Tokens are an integral part of the decentralized economy and often serve as the virtual foundation of the blockchain networks they inhabit. Tokens provide means of exchanging value within peer-to-peer (P2P) networks or in marketplaces built on top of a particular token.
They also provide incentives and rewards to network parties and secure the functioning of decentralized applications (dApps). Tokens can power functions such as voting mechanisms, rewards, governance models, loyalty programs, and fundraisers.
Most often, tokens utilize the same technology as Bitcoin or Ethereum, known as “utility tokens”, in order to provide a function within an ecosystem of services or products. Some tokens are designed as security tokens, designed to represent investments in underlying assets.
Note that not all tokens are regulated as securities and many bypass any security obligations under existing laws. All token exchanges involve some risk, especially when regarding smart contracts. Therefore, it’s necessary for users to be aware of the functions of each token before conducting any exchange or investment.