A token is basically a means of exchanging value or service using a form of currency. In the traditional sense, we use tokens for a variety of reasons. It is used as a way to validate a service or transaction, representing money. Back in the days, tokens were used on tolls, subways and in arcades. You purchase the tokens first using real money in your native currency. For example, to ride the subway you would first pay $1.50 to the attendant at a booth. The attendant then gives you a token which you then use to insert into a slot at the turnstile. If the token is accepted it opens a gate that allows entry to the subway train deck. Likewise at the arcade you pay first for tokens before you can use the video game machines.
Tokens provide a means to control the use of a device, like the video game machines in the arcade or account for usage, like passengers using the subway. It has its purposes as a means to exchange value for the use of something (e.g. transportation, entertainment, etc.). The use of tokens can also help regulate or secure the use of services, for management purposes. In an arcade, the operator wants only their customers to use their machines. They want to to be able to track the machines as assets and only have customers use it. A rival arcade’s tokens will not be allowed by their establishment. By issuing tokens, they are able to accomplish that.
In cryptoeconomics, tokens are also used. It has the same purpose, but it is in a digital format. Tokens from a cryptoeconomic context store a value that can be exchanged for something. It is also expended as a fee to perform computations to secure and process transactions. Tokens are also called coins, but there is a difference in their purpose when using these terms. A coin refers more to the cryptocurrency itself. You can call the coin as Bitcoin, while its token is BTC. When expending the coin you can refer to it as a token of the cryptocurrency’s blockchain network. It is a unit of value for that particular blockchain. On Ethereum, there are different token types that can be exchanged for value. The ERC20 token, used for funding projects, can be exchanged for Ether and converted into other cryptocurrency using smart contracts.
Tokens in cryptocurrency are also used to verify a user’s ownership of a coin. All tokens are associated with a public address that refers to the holder of the coin or token. This cannot be disputed on the blockchain since it is validated and tamper resistant. This provides a way to verify if a person is being honest when conducting a transaction. There is always a trail of provenance that records the history of a token when used in a transaction. Bad actors attempting to forge fake tokens will not be able to because tokens can only be issued through the blockchain by way of consensus (e.g. proof-of-work, etc.).
A token is like a certificate of authenticity or proof of ownership regarding a coin. During a trustless transaction on the public blockchain, if a user Alice and another user Bob conduct a transaction, their public address is recorded along with the transfer of value of the token they hold. It transfers ownership from one user to the other. Supposed Bob wants to sell his unused television to Alice directly, they enter into a P2P (peer-to-peer) transaction. Bob asks for 5 Ether which Alice then pays using a smart contract on the Ethereum blockchain. The smart contract executes with consent from both parties and the token exchange takes place allowing 5 Ether to transfer from Alice to Bob. The good thing about smart contracts is that before any transfer of value can take place, a condition can be created that the physical item must first be delivered to Alice before Bob receives a payment.
Tokenized economies based on smart contracts allow more transactions to be conducted directly without middlemen or third party platforms. The blockchain is the layer of trust that facilitates the transaction, and never blocks or censures anyone. Like in traditional economies, tokens are used for tracking and accountability purposes. This also transfers value in exchange for goods and services.
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