A coupon can entitle you to a free drink. A casino chip could be worth one hundred dollars. A digital token works in the same way. It represents a specific amount of digital resources you can own, assign to another, or redeem later.
Digital tokens are either intrinsic or created by software and assigned a certain utility. Examples of intrinsic digital tokens are Bitcoin and Ether. The other type of digital token is asset-backed, which is issued to represent a claim on a redeemable asset, such as legal tender or precious metals.
Other interesting terms…
- What is Bitcoin?
- What is an Initial Coin Offering (ICO)?
Read More about a “Digital Token”
You may have encountered several people or businesses who offer to pay or accept payments in the form of digital tokens. Digital tokens also go by the name “cryptocurrencies” as they are a type of crypto asset. They function as a medium of exchange, albeit on limited platforms, since not all online businesses accept cryptocurrencies.
What Can You Buy Using Digital Tokens?
Although cryptocurrency has become the rage as of late, it still can’t be used to buy everything. So what, exactly, can you buy using a digital token? Here are some examples:
- Domain names: Domain name registrars, such as Namecheap, accept cryptocurrency payments, specifically Bitcoins.
- University tuition: A private school in Cyprus was the first university to accept payments in Bitcoin.
- Hotel accommodation: Expedia, one of the largest travel booking sites, allows its users to pay for their hotel accommodation using digital currency.
- Electronic gadgets: Some e-commerce stores that specialize in selling electronic devices now accept Bitcoin payments. Newegg is an example.
- Jewelry: You may now buy watches, earrings, and jewels using digital tokens. Reeds Jewelers is among the merchants that accept such a payment method.
- Donations: You can also donate to nonprofit organizations, such as Wikimedia, the foundation behind Wikipedia, and Save the Children in the form of cryptocurrency.
These are just some of the items that you can pay for using digital currencies. However, you can buy almost anything using Bitcoins or any cryptocurrency since some retail stores, such as Overstock, accept this method of payment. Shopify has also given its merchants a choice to accept digital currencies.
3 Types of Digital Tokens
Notice that our list above mentions Bitcoins repeatedly. Bitcoin is only one among thousands of cryptocurrencies in the market. This fact could be overwhelming for anyone, even those who are well-versed in the industry. Digital tokens though can be categorized into three major types:
- Currency tokens: Bitcoin is a type of currency token meant to pay for goods and services. Bitcoin was, in fact, created to replace fiat (paper) money.
- Utility tokens: Utility tokens are more than a means of payment. Specifically, they give users the power to trade cryptocurrencies at lower fees since utility tokens provide them access to the developers’ platforms. An example of a utility token is Ethereum, although it can also fall under the currency token category. Ethereum, an example of a utility token, was intended for use on a single platform.
- Asset or investment tokens: By the name itself, these tokens refer to assets that can give investors a positive return on their investment. An example is The DAO, a blockchain company backed by a smart contract.
How Do Digital Tokens Work?
Think of digital tokens as casino chips that you can use as substitutes for cash when playing games. Like casino chips, digital tokens are unregulated but valuable, as they have particular values when converted to paper money.
A digital token facilitates real-world transactions via a decentralized technology—blockchain. Users can make payments and keep money without going through third-party providers, so the deals they enter into are more direct. This transaction method is often preferred because it doesn’t require an intermediary, making it faster and more affordable for both parties.
How Can I Get a Digital Token?
Those interested in getting a digital token can participate in an initial coin offering (ICO). From there, you can buy digital tokens from the organizing company following this process:
- Register for an ICO via the company’s website.
- Choose the digital token of your choice (i.e., Bitcoin or Ether).
- Move the digital tokens you purchased to your wallet.
- Buy ICO tokens by sending your tokens to the company’s wallet address.
- Receive your ICO digital tokens in your wallet.
- Store your ICO digital tokens in your preferred wallet.
If you miss an ICO, you can still buy digital tokens once these are listed on coin exchanges. Often, digital tokens are traded against Ether and Bitcoin, so their price points are higher.
Is Digital Token Use Safe?
Digital tokens are often passed around from one person to another. So the concern about their overall safety and security is understandable. In general, digital token use is safe because each transaction gets recorded on a blockchain, which is tamper-proof. The decentralized ledger gives full transparency of a token’s ownership via the owner’s wallet address.
The digital record also strengthens security because the logs can’t be altered. If there is one thing that you should be wary about, it is the growing number of malicious people scamming others by offering illegitimate ICOs.
What Is a Digital Token Offering?
A digital token offering is a means for people to visit websites and buy digital tokens using paper money (e.g., U.S. or Canadian dollars) or another cryptocurrency like Bitcoin or Ether.
You can liken it to a foreign exchange (forex) platform or a bank that lets people buy foreign currency for their travels, for example. A person from the U.S. who’s going off on a vacation in Greece can go to his bank to buy euros using U.S. dollars.
Digital token offerings, however, exchange the cryptocurrency of your choice for either money or other kinds of coins. They are also known as “initial coin offerings.” Investors typically go to them to “invest” in new cryptocurrencies in hopes that they’ll earn from these in the future.
Example of a Digital Token
Cyber Cosmos is an example of a set of digital tokens in the form of NFT characters created to encourage people, especially women, to join the InfoSec industry. Each token is an investment artwork and represents the author’s ethos of strength, fairness, and equal opportunities for women. In the future, these tokens will also allow users to connect in the Metaverse, the virtual reality intended to supplant the Internet.
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Digital tokens have been around for about two decades now, and more people are becoming familiar with them. The number of items you can buy using cryptocurrencies is one proof that they are slowly getting accepted. Whether or not traditional industries would also start taking digital tokens as payment, only time will tell. After all, blockchain, the technology that powers digital currencies, has a lot of potential in healthcare, agriculture, music, and other sectors.
Key Takeaways
- A digital token represents a specific amount of digital resources you can own, assign to another, or redeem later.
- You can use digital tokens to buy domain names, electronic gadgets, and jewelry; pay for university tuition fees and hotel accommodations; and make donations.
- Three kinds of digital tokens exist today—currency, utility, and asset or investment tokens.
- In general, digital token use is safe because each transaction gets recorded on a blockchain, which is tamper-proof.
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