What is an ICO Token and How Does it Work?
What is the Definition of a Token within Crypto?
A token within crypto can be defined as an entity with a value that is specified by the issuer. If it is an apparel company, a token can be equal to the value of an outfit or an annual software license in the case of a multinational company. We are also capable of issuing a token and have the power to buy an hour of work with the purchased tokens. With this, we have the power to tokenize every digital item.
What is the Difference between Cryptocurrencies and Tokens?
Tokens are not entirely the same concept as cryptocurrencies. It is a simple process and does not require creating a new Blockchain to issue tokens, which is essential for a cryptocurrency since an existing one is used. This would usually be Ethereum which was initially created as a platform to handle smart contracts and later evolve into a currency.
The currency is a counterpart of money and something that defines value and serves as a transfer of value.
A token can be taken as a symbol of a contract and the value does not depend on mining, the price of gold, or any other dynamic market standards that keep changing. A crypto token can generate ownership and authority on a specific asset or it can be the payment method for a specific good, it can be anything that is stipulated within a contract.
What is a Token Contract and How Does it Work?
We know that a token cannot be considered as a currency, yet we see that tokens have a value that is specified for their transactions. So how do these transactions take place in the market and what goes behind their regulation? You will need a platform to carry out these operations. For instance, let’s use Ethereum as it is one of the most popular platforms for the creation of tokens in Smart Contracts.
Here is the full contract cycle:
- Token creation: A company or business outlines the fundamental rules and policies that will regulate the flow of tokens which includes values of tokens, conditions, and much more. Once they are created, the token platform will serve as a smart notary that will certify all future transactions, ensuring that all conditions are met.
- Token Acquisition: It is a simple and straightforward process, similar to that of a vending machine when you buy a drink. You drop the coin, select the token and receive it.
- Token Transaction: You can transfer the token using the online wallet, or use the same platform from where you issue your token. When this is done, a virtual notary, that is powered by a smart contract, will make sure we do it according to the regulations. In addition, all portfolio activity is constantly logged and updated on the system.
Is this process of token creation free of cost? The vending machine technician, and the delivery of the items. All need to be paid. The cycle of processing an operation is named “gas.” Therefore, every time they ask to buy or sell tokens, a little amount of this will be spent and your fee will be paid automatically.
It is important to note that the gas rate is not static. Several pending transactions possess the power to define the maximum ceiling that we are willing to pay for the gas. If the cost of a token is approximately $10 and the gas fee is $20 that is not a satisfactory deal, right? So we decide that we cannot pay anything that costs us more than $ 2 for the “gas”, so we click on “send”. The system will serve the highest gas bids sooner, and when the time comes, it will come to ours, which is the lowest. There is a possibility that we will wait a long time If we want more speed in the operation, we have the option of raising the maximum that we are willing to pay for the “gas”.
Let’s look at the most common types of tokens that are available in the market:
Token- token (utility tokens), the most popular type of tokens:
If you recall the amusement parks of your childhood you will remember the tokens and tickets you would receive to buy games and toys.
Let’s assume that a company is an amusement park and with the tokens, we can avail of different services that the company offers, just as we did with the rides and hot dogs in the amusement park. park starts its operations. If the park becomes popular, our limited production tokens will
To pair it with the perfect analogy, let’s say we can purchase a lot of tokens before they become expensive since many will want the tokens to enter the park.
This is essentially the idea that goes behind the trading of tokens. If it’s the same case with an amusement park and we know that we have to buy the tokens at the entrance, where can we buy the utility taken from.
The answer is an ICO – Initial Coin Offering.
Token – action (Securities tokens)
In this situation, the initial coin offering will work similarly to an Initial public offering. Generally, security tokens are issued when a company does not wish to execute a cryptocurrency technology.
When this happens, the holders of the security tokens will receive a bonus or a fixed commission in return. In a few cases, they will also be able to participate in the decisions of the company that issues the tokens. All of these benefits are granted to support the project early in its time.
Keep learning about the topic at Differences between ICO – IEO – STO
Token – credit
This type of ICO token is a loan. A holder can present this to the company and receive money in return, with an additional form of credit.
Token – combo
This type of token consists of a combination of 2 or more types of tokens. For instance, the Sia and Digix tokens are both considered tokens and shares. Steemit has all three types of tokens (Steem, Steem Dollars (SBD), and Steem Power which is a denomination of VESTS.
How Do We Trade the ICO Tokens?
This process is very similar to when we trade with bitcoin and cryptocurrencies. We will have to register with an online exchange to buy, sell, and trade tokens.
The circumstances of the transaction can be very complex to understand. The contract can include multiple rules such as “you can sell it only before a specific date” or “after a date, but only for a certain supplier.” Therefore, when we decide to invest in an ICO, we will have to read all the conditions that are set very carefully. So when we decide to invest in an Initial coin offering, you will have to read all the conditions that are set carefully.
Learn here some tips to invest in an ICO: How to choose an ICO in which to invest?