What is a token?

A token is a unit of account used to represent a digital balance in an asset. Tokens are recorded in a database based on blockchain technology, and accessed through dedicated applications using digital-signature schemes.

— Equity tokens — represent a company’s shares.
— Utility tokens — capture value within an online platform’s business model (reputation, points for certain actions, in-game currency).
— Asset-backed tokens — digital claims on real goods or services (kilograms of carrots, an hour of a builder’s work, etc.).

Only asset-backed tokens are directly backed. In this case, the token is a digital twin of a real (physical) asset or service. For example, one token may equal one square metre of living space or a single cinema visit. The organisation that stores the goods or provides the services guarantees conversion of the token into its backing.

Tokenisation is the process of transforming asset recording and management so that each asset is represented as a digital token. The point is to create digital counterparts to real-world valuables for faster, safer handling. For example, a bakery owner sets up an electronic ledger and issues digital claims on loaves — tokens. With a solid reputation, the owner can pre-sell loaves by selling tokens on online marketplaces. Any token holder can then come to the bakery and redeem one token for one loaf.

Unlike cryptocurrencies, tokens can be issued centrally (run by one organisation) or in a decentralised way (governed by a preset algorithm). Transaction processing and acceptance can likewise be centralised (all servers controlled by one organisation). Token pricing may depend not only on supply and demand but also on additional factors (a peg to an external asset, conditional issuance or reward rules). Also, unlike cryptocurrencies, a token does not have its own blockchain.

You can buy tokens through online trading services (exchanges and exchangers), or via private deals (where buyer and seller agree directly). The trading process is identical to that for cryptocurrencies. In addition, token issuers often embed purchase options on their project websites using traditional electronic payment methods.

For transfer and storage, tokens resemble cryptocurrencies. Dedicated wallet apps are used to store and manage keys and to create and sign transactions. As a rule, these apps are part of the tokenisation platform’s infrastructure.

— Speeds up trading, as real assets do not have to be moved and ownership paperwork is unnecessary.
— Improves storage and transfer security by recording transactions on a blockchain.
— Reduces reliance on intermediaries, since their role can be codified in a smart contract or removed from the chain.
— Expands infrastructure functionality by adding modules (multi-factor authentication, invoicing, recurring payments, top-up cards).
— Improves usability, as many platform features can be integrated into a mobile app interface.

— A robust database (verifying the integrity and authenticity of each subsequent system state).
— No single point of failure (transactions processed and accepted by many independent servers).
— Reliable auditability (an auditor can verify the correctness of the platform’s entire change history).

— Users’ private keys can be lost or stolen by hackers — hard to predict or insure against.
— Preserving confidentiality on public blockchains is difficult, because transaction data must be open for verification.
— Scaling a decentralised ledger is hard, as such databases have strict throughput limits.