Token

Key points

• A token is a digital unit issued on an already existing blockchain, created and controlled by smart contracts that follow a technical standard.
• Unlike a native coin, which the network itself issues, a token is launched by a project on top of that network, following rules such as the ERC-20 standard.
• A token can represent value, access to a service, participation, or a unique item, depending on how it was programmed.

What is a token?

A token is a digital unit issued on a blockchain through smart contracts. While a network's native coin, such as the asset used to pay fees, is part of the protocol itself, tokens are created by projects that build on top of that network. They inherit the blockchain's security but have rules and purposes defined by whoever issues them.

How it works

Token creation follows technical standards that define how they behave: how they are transferred, queried, and accounted for. The best-known standard for fungible tokens is ERC-20, used on networks compatible with the Ethereum virtual machine. A smart contract records balances and executes transfers according to these rules.

Tokens are usually divided into categories by function. Stablecoins are tokens that seek a stable value. Utility tokens grant access to a protocol's functions. Non-fungible tokens represent unique, non-interchangeable items. The same technical standard can serve very different purposes depending on the project's design.

Since anyone can issue a token, its existence says nothing about quality or backing: that depends entirely on the project behind it and its actual use.

Why it matters

Most assets used in on-chain payments are tokens, including the stablecoins that represent fiat currencies. For a company, understanding that a token is defined by a smart contract helps assess risk, since the asset's security and rules live in that code rather than in a central authority. Evaluating a token, therefore, means evaluating the project and the contract that support it, not trusting the label itself.

Risks and limitations

Because issuing a token is simple, the market has many assets with no real use, low liquidity, or abandoned projects. Security depends on the smart contract that defines it, which may contain flaws. The token label indicates neither value nor backing, which requires evaluating the purpose and soundness of each asset on a case-by-case basis.