What Is An Ethereum Token: The Beginner`s Guide

A `token` by definition is a representation of any fungible tradible good such as currency, loyalty points, gold certificates, in game items and more.

The primary difference between Ethereum and any other cryptocurrency is that it`s not just a currency, it`s an environment. Here anyone can take advantage of the blockchain technology to build their own projects and DAPPS (decentralized applications) through smart contracts. This is a very important distinction because this very thing shows you the true scope of what is possible in Ethereum.

Think of Ethereum like the internet and all the DAPPS as websites that run in it. There is something really interesting about these DAPPS, they are all decentralized and not owned by an individual, they are owned by people. The way that happens is usually by a crowd-sale called the `ICO` (more on that later). Basically, you buy certain tokens of that DAPP in exchange of your ether.

These tokens are usually of 2 varieties:

• Usage Tokens
• Work Tokens

Usage Tokens: These are the tokens that act like native currency in their respective DAPPS. Golem is a pretty good example of this. If you want to use the services in Golem then you will need to pay with Golem Network Token (GNT). While these tokens have monetary value they won`t give you any particular rights or privilege within the network itself.

Work Token: These are the tokens that identify you as a sort of shareholder in the DAPP. Because of that, you have a say in the direction that that DAPP takes. A perfect example of this is the DAO tokens. If you were a DAO token holder then you had the right to vote on whether a particular DAPP could get funding from the DAO or not.

Why Do We Need Tokens?

Right now you must be wondering, if all these DAPPS are made in the Ethereum Network, then why don`t we simply use Ether to pay for every transaction within those DAPPS? Why do we need a native currency for them? The answer to that is pretty simple, even in real life, there are tons of places where we use a form of token over cash.

Remember that time you went to the water park? Remember how they took your money and tied a band around your wrist which you used to gain access to all the rides in the park and to buy food as well? In this example the water park is the DAPP, your money is ether and the band is the token.

Okay, how about the time you bought those movie tickets for Wonder Woman and included an extra popcorn and coke in your ticket? The moment you entered the theater how did you get in the hall? You showed them the ticket. How did you buy your popcorn and coke? Again, by showing them the ticket. In this case, the cinema theater is the DAPP, your money is Ether and the ticket is the token.

By using tokens to execute certain functions in the smart contract of the DAPPS you make the process much more simple and seamless. Plus, tokens are also great for the overall value of ether as well (more on that later). Before we go any deeper, let`s first learn how exactly can one create a token and how can a DAPP issue tokens in exchange of ether.