Digital tokens are still very much in their infancy. Right now, it’s an exciting and promising space for creators and blockchain enthusiasts. So what is a digital token and how do digital tokens work? Let's take a look.
What is a digital token?
Digital tokens are either intrinsic or created by software and assigned a certain utility. Examples of intrinsic digital tokens are Bitcoin and Ether. The other type of digital token is asset-backed, which is issued to represent a claim on a redeemable asset, such as legal tender or precious metals.
In a word, digital tokens are digital assets represented on a blockchain by means of a smart contract, so they have greater utility than coins, which are used solely as stores of value and currency. Even things that you might not think of as having a digital representation can be represented by digital tokens. That includes things like artwork and consumables.
There are two main types of digital tokens — fungible and non-fungible. Fungible tokens are essentially units of an account. Non-fungible tokens are different, and this is where the concept of digital tokens starts to get really interesting.
How do digital tokens work?
Think of digital tokens as casino chips that you can use as substitutes for cash when playing games. Like casino chips, digital tokens are unregulated but valuable, as they have particular values when converted to paper money.
A digital token facilitates real-world transactions via a decentralized technology—blockchain. Users can make payments and keep money without going through third-party providers, so the deals they enter into are more direct. This transaction method is often preferred because it doesn’t require an intermediary, making it faster and more affordable for both parties.
Hope this article can help you get a further understanding of what is a digital token and how do digital tokens work.
