What is a token? A glossary of terms
This article provides answers to all token-related questions. The most important and puzzling term has to be the token itself - in economic sense, it is virtual and encrypted confirmation of a certain transaction. It offers a modern solution to universal problems in the financial world. In a broader sense, token means something that is a representation of something else, for example, tokens in a casino representing traditional money. It can also be used when monitoring a product in a supply chain. When you mark the product with a token, you can easily trace it.
Coin and token are not interchangeable terms. Tokens are digital chips or counters representing assets. They are used on blockchain (decentralized database) which is created specifically for a certain cryptocurrency. Coins of said cryptocurrency are used as a means of transaction. It is possible to emit different kinds of tokens on one blockchain, for example on Tecra Space each Creator emits their own Space Token. Space Token is a confirmation of the contract between the investor and the creator that is impossible to forge.
Why has tokenization gained so much recognition recently?
We live in times of recurring financial crises. A centralized system, which thus far came across as the most trustworthy, has let us down multiple times - for example, it has failed to provide financial stability and security, as well as has seen seemingly never-ending failures in the private data management sector. And henceforth, blockchain and decentralized registries started gaining in recognition and popularity.
Owing to this type of technology there is no need for middlemen in order to manage data and information which enables people to feel more secure. Tokenization gives rise to the financial revolution of the 21th century - it offers an innovative alternative to central banking and it complies with the global sentiments as well as provides solutions to its problems.
On our platform, you can buy the tokens only by trading it for TCR. Remember that tokens and cryptocurrency cannot be equated. Tokens are made through smart contracts, while cryptocurrency is used as a purchase method for the tokens in the same protocol.
Decentralized blockchain systems allow the emission of tokens of any kind. In the new way of collecting funds, each token represents a unique asset. Each platform has its own protocol standard. The most popular one is ERC20, the token based on Ether cryptocurrency on Ethereum platform but its emission requires a developer's background. Another popular type of token is emitted on Waves platform. It has a very easy emission process and its emission costs around 1 dollar.
Types of tokens and their main differences
Due to the vast range of tokens they can be divided into a few categories:
- Security token is a confirmation of a possessed asset, working similarly to traditional securities. People who own such tokens don’t have ownership of the product they invested in, but they have a guarantee to a certain percentage of profit generated by the product. Their exchange is possible only after passing KYC (Know Your Customer) / AML (Anti Money Laundering), complying with guidelines and passing verifications in the financial services, which are meant to secure both parties against financial frauds. Security tokens are therefore a great solution for decentralized crowdfunding, as they ensure a bigger safety of transactions. The sale of this kind of token is called STO (Security Token Offering).
- Equity Tokens are similar to traditional financial assets, because their holders have property rights to particular products - this token is therefore a record of a share and its exact percentage.
- Utility tokens or digital assets. Their differentiating factor is the possibility of an anonymous exchange. Typically, they are used within the confines of a specific platform (eg. Ethereum) and are a form of a coupon or a “loyalty pack”.
Tokens primarily were often emitted as a part of ICO (Initial Coin Offering). Depending on the type of the token, token emission can take a form of a different variation of tokenization, like ETO, STO, etc.
ICO and similar types of fundings can be a source of capital for startup companies and other projects that don’t have the capital needed for their development. Companies usually opt for ICO using the utility tokens. Thanks to automatized smart contracts provided by given startups, investors can expect certain benefits and profits after a set period. Depending on the type, each token is subjected to different laws and regulations, which limit their holders in different ways.
What is the value of tokens?
Tokens, as a matter of fact, are neither a currency nor a stock, but they do possess certain traits of both. They also have their own, unique characteristics, that’s why pricing them is a complex task. To give an example, let’s look at Space Token, which ratifies an agreement between token’s holder and creator. After releasing the final product on the market, token’s value will depend on its demand, which is the commercial success of the project.
Business models based on token economy
Every investor after financially supporting a project, in turn receives some kinds of rights or privileges, for example, copyrights, licensing, or voting rights. This type of social infrastructure reorganization in the world of investment contributes to a bigger involvement of financial benefactors in the project realization. Tokens can be exchanged for services - usually a very specific type of services linked to the ecosystem of the platform.
So what does “project tokenization” actually mean?
Tokenization means creating tokens and setting their value. It’s a form of changing conventional assets into digital ones. The simplest way to do so is by assigning your tokens to a specific conventional currency, for example: emission of 1000 tokens after securing one thousand dollars, which would give one token the value of 1 dollar.
Why is tokenization the most optimal method for crowdfunding?
Thanks to blockchain technology this type of funding is much more transparent. Depending on the specific nature of each project, the investors can, with varying degrees, influence the project (for example they can halt funding in case of the project not complying with its obligations) and supervise the investment allocation thanks to services like blockchain explorer, which help to browse through the content of transactions in the chain of blocks. Blockchain ensures transparency, in which conventional forms of crowdfunding were lacking. We believe that it’s a huge improvement of the quality in the world of finance, which will help to establish a bigger sense of security in the face of a crisis.
What does the tokenization process on Tecra Space look like?
The tokens used on our platform as evidence of investing in individual projects are called Space Tokens. It is possible to emit two kinds of tokens on Tecra’s blockchain: fungible and non-fungible. Fungible tokens are digital assets built in a way that each individual token is equivalent to the next token of the same type and value. Non-fungible tokens have a unique value and are not mutually interchangeable with other tokens. On the Tecra Space platform, it is only possible to emit fungible tokens. Project creators emit their own Space Tokens, which are obtained by investors after their payment in TCR as a confirmation of the agreement. During the fundraising stage, it is up to the creator to decide what percentage of the funds are going to be dedicated to repurchasing the tokens back from investors after the project has achieved success. Remember that investor’s TCRs are not handed down to the project creator straightaway. Instead, the funds are given in tranches after the project reaches set milestones, which helps investors to better supervise how the capital is used for the development of the project. After a project is finalized and successful, the creator repurchases the tokens. The creators do not own any tokens, so the token prices are up to investors who are the sole holders of that asset.
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