Cryptopedia, ICO 101

What Is an ICO Token & How Does It work?

What is an ICO token? An ICO token, is the entity with value for a specific purpose. For example, if you have a start-up in fashion industry, a token...

Written by Wallebi Author · 2 min read >
What Is an ICO Token

What is an ICO token?

An ICO token, is the entity with value for a specific purpose. For example, if you have a start-up in fashion industry, a token can represent the ownership of a dress. You can even issue your own tokens and token holders will be able to buy one hour of your work with the token. Generally, you can “tokenize” everything. In this article we are going to have a full guide for ICO tokens in cryptocurrency world.

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The difference between tokens and cryptocurrency coins

The main difference is tokens are not currency. In order to have a cryptocurrency you need to have a blockchain at first. But, to have a token you don’t need to develop a blockchain as you can use the existing ones. The best choice could be the Ethereum blockchain, which designed as a platform for smart contracts.

Owning a coin is equivalent to own money. It serves as a value transfer and defines value.

On the other hand, a token is a symbol of a contract. The value of a token is not depended on dynamic market criteria.

For example, a start-up company can sell its own tokens and give one year of free membership to the token holders. Once the project is successful, the company should do what promised in the smart contract.

What is a token contract and how does it work?

However, a token is not a coin, its value and transactions require to be regulated. So, how does it work? First of all, you need to have a platform. In this case the Ethereum platform could be a suitable choice as it’s the famous platform for smart contracts.

The contracts cycle is as below:

  1. Tokens creation

First of all, the company writes the basic rules such as token value, token amount or any special conditions. Those rules are constant for all the future transactions. In fact, they make sure that all the rules met.

  1. Tokens acquisition

The process of buying a token is very similar to buy a drink from vending machine. You reach the machine, drop your coin and choose the drink you are willing to buy. First, the machine will check if there is stock for the drink you chose as well as if you are eligible to buy. If everything is fine, you get your drink and leave. So, the process is same for buying a token as well. You transfer your money, choose your token and if you be eligible you will receive your token in your wallet.

  1. Token transaction:

Once you received your tokens on your wallet, you can transfer them to others. When you transfer your token by using your wallet, the smart contract makes sure that your transaction meet the basic rules. In addition, all the activities of a wallet are constantly recorded and being updated.

Is that process for free?

In order to perform a transaction on the network, you need to pay a fee known as “Gas”. The “Gas” fee is not fixed and it depends on the number of transactions waiting for confirmation.

What Is an ICO Token; Types of tokens

Utility tokens

This type of token is the most popular one. By buying utility tokens you can use company’s services. If you buy a token before the project launch and the project becomes successful, then value of your tokens will rise and you can make some profit.

Equity tokens

Equity tokens issue when a startup doesn’t need a crypto technology. In fact, in this case, the ICO is completely same as IPO. By buying an equity token you will get fixed commissions or dividend. You can even take a part in the company future decisions.

Credit tokens

Buying this type of token is a way to invest in a startup and get profit. It’s a way for startup companies to raise money from investors. In this case, you invest a certain amount of a token and get a certain amount percentage of profit.

What Is an ICO Token; Trading tokens

Trading tokens is very similar to trading coins. First, you need to sign up on an exchange in order to buy and sell your tokens.

However, it’s a bit different with selling coins. There may be some conditions if you want to sell your tokens. For example, you can sell it only before a specific date. So, before buy a token and invest in do enough research to be aware of all the conditions.

Written by Wallebi Author
Author and analyst in the field of cryptocurrency Profile

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