A token is a blockchain-based asset that is created to perform a specific function.

A crypto token’s functionality is described by a smart contract (a set of rules outlined and enforced by computer code) and defines the token’s utility.

Tokens are used for a number of crypto/DeFi/web3 functions. Some popular uses of tokens include:

  • Stablecoins (tokens pegged to real world assets such as fiat currencies)
  • Exchange tokens (tied to the use of crypto exchanges)
  • DeFi assets (tokens used to interact with DeFi products and services)
  • NFTs, or non-fungible tokens (where each token is tied to a unique work, such digital artwork or proof of ownership of a physical object)

One interesting element of tokens — and what sets them apart from other types of digital assets — is that they leverage the security and network effects of other blockchains. This means that tokens and token

One thing to beware of with a new token-related project is how the tokens are created or issued. Here are few common ways that tokens enter circulation:

  • Initial coin offerings (ICOs) were initially popular back in 2015 through 2018-ish. Ethereum had an ICO, as did other now well-established projects. An ICO is similar to an initial public offering for traditional securities: A token project drums up support, outlines its value proposition, and then launches the token for sale on crypto markets. While the ICO model did work successfully for some projects, it also became a massive opportunity for fraud. During the crypto market bull run of 2017, token projects would pump their idea, founders or early insiders would make a lot of money during the ICO process, but then the project would disappear, or stall — or the early participants would just leave after the token price became elevated.
  • Airdrops are a different means of distributing tokens and became more popular as a means to avoid the scam feel of ICOs. Airdrops happen in a lot of ways
  • Community distribution is when the user base of a product or service gets access to the tokens.

When evaluating a new token-based project and trying to access the value or potential value of a token, one thing to check out is the total token supply (is it capped or uncapped?), the circulating supply, and who owns the supply (is it largely held by the project’s founders and investors, or is it evenly distributed and traded among a community of engaged users?)