What are blockchain tokens?
Tokens are a key primitive used in blockchain applications. Tokens can be used to represent anything. For example, they can represent a store of value, digital or real-world asset such as property, art, goods on a supply chain and securities.
There are no limits to what can be represented as a token. Tokens are considered to be a key primitive of web3, in a similar vein to how the website was a key primitive of the original web.
Tokens can be divided into two general categories, fungible and non-fungible.
Fungible Tokens
Fungible tokens are tokens that are non-unique, one token of the same type is interchangeable with another token of the same type. For instance, money is a type of fungible asset. You can change one dollar bill for another and they both have the same utility.
Fungible token properties include a name, short name or symbol, a total supply and decimal precision supported by it.
Non-fungible tokens (NFTs)
Non-fungible tokens (NFTs) are tokens where every token is unique. One token may be similar to another, but they have properties that ensure no two tokens can ever be the same. Dollar bills have a serial number on them which can uniquely identify them, although in terms of utility very few people care about serial numbers on them.
NFTs typically have a name, a short name or symbol, a total supply and a URI such as ipfs://QmTvCyRe4DqGNFCMEcy4jDjjVewPpqqnK7BbVnfegozd13/1.json which provides additional metadata about the token.
Tokens in Web3
In the context of web3, fungible tokens most commonly appear as utility tokens or stablecoins. Where utility tokens provide some sort of utility for users of a web3 protocol. For instance, the ENS project token is used to contribute to the governance process of the ENS project, which decides on topics such as how to allocate the revenue the project collects to further the development of the project.
Stablecoins are tokens used to represent fiat currencies such as the U.S. dollar. By having a token which represents real-world currencies, web3 users are not exposed to the price volatility associated with cryptocurrencies, and web3 applications can choose to support USD as a currency. USDC is one such well-known stablecoin.
Some cryptocurrencies are defined as tokens. However, in Ethereum the Ether cryptocurrency is not natively a token, it is a component of the Ethereum network used to pay for computation (this is discussed further in What are gas fees?). However, it is possible to create a token representation of the Ether cryptocurrency (one already exists named wrapped Ether — WETH).
Thus far NFTs are often associated with digital art, where an NFT represents a unique image that is owned by a specific wallet on the blockchain. This has been a very speculative asset class in web3 during the past couple of years. However, the applications of NFTs is far broader than this, as an NFT can be used to represent any unique real-world or digital asset.
The Cryptopunks and Bored-Ape Yatch Club NFT projects are the best-known NFT projects. One of the features that makes them so popular is that royalties are enforced by the smart contract that manages the token. This means that every time an NFT changes hand, it’s possible for a percentage of the sale price to be passed to the original creator of the NFT as a royalty.
Longer term, whilst there will still be digital art NFTs, this will be a small component of a much larger market.
Tokens in Ethereum
Tokens in Ethereum are created as smart contracts. Where a smart contract is used to define, control the supply and manage ownership of tokens. Tokens, like cryptocurrencies, are associated with a wallet.
Find out more about tokens using a block explorer
If you use a block explorer like Chainlens, the dashboard provides statistics about the different types of tokens that are deployed on the network. There are other ERC standards that build upon ERC-20 and ERC-721. ERC-1155 is a hybrid token standard which combines fungible and non-fungible tokens into a single smart contract, and ERC-777 provides improvements in token management on the original ERC-20 standard.
You can use the tokens view to see details of all tokens that have been created on the network. They are labelled fungible, non-fungible and hybrid depending on the token standard they use (ERC-20/ERC-777, ERC-721 and ERC-1155 respectively).
Using the filters you can view tokens that match a specific type. You can combine this with sorting to find the most active token contracts.
Tokens are identified by their name, which you can click on to find out more information about that specific token. This view includes attributes such as the token’s symbol and underlying contract address.
It also includes details of transactions and events that took place with that token’s contract, and the token transfer events and details of the holders.
Summary
Tokens are used to represent physical and digital assets on a blockchain. Tokens are the key digital primitive in web3, much like the web page was the primitive of the early web.
There are two main types of token — fungible which represents tokens that are interchangeable with one another, and non-fungible (NFTs) where every token is unique.
Common use cases for fungible tokens include utility tokens and stablecoins. For NFTs they are most commonly associated with digital art, however, their applicability is far broader than this.
Tokens are defined using smart contracts and reside in cryptocurrency wallets. Cryptocurrencies can be created as tokens, but they are often separate. The Ether cryptocurrency is native to the Ethereum network, it is not defined as a token via a smart contract.
Become a web3 native by reading all of our Blockchain Explained articles.