Tokenomics 101: What Are Ethereum Tokens and How They Work

In Ethereum, tokens are created on the protocol level as a standardised unit to represent any fungible tradable goods: physical, digital, or even other currencies. When someone decides to create a new type of Ethereum token, they can program it with whatever rules they want.

Ethereum tokens (ERC-20) can create new business models and projects that wouldn’t otherwise exist. Without Ethereum, you can still trade Bitcoin (or whatever other currency), but with Ethereum, you can launch your currency.

Ethereum tokens (ERC 20) take advantage of Ethereum’s technology to make the coin itself act as a decentralised application. This means it doesn’t just have an existence on one computer or server.

If you run Ethereum software anywhere in the world, it’ll automatically find all the other computers running similar software and sync up with them, creating a global network.

What is ERC-20?

Ethereum tokens (ERC-20) are standardised. So, they all adhere to an Ethereum token standard, which is called ERC-20. This standard provides a set of rules that Ethereum tokens must implement.

Because most ICOs (and many Ethereum apps) issue their own Ethereum tokens, adhering to this standard makes it easy for app makers to integrate them into their projects without changing any code.

It’s possible for anyone with some programming skills or money to start their own Ethereum token and release it on the market.

Currently, thousands of different Ethereum based tokens exist.

How Does It Work

Ethereum tokens come in two main varieties: fungible and non-fungible. The difference between them is that fungible Ethereum tokens, just like Bitcoin, can be interchanged with other units of the same type (i.e., 1 Ethereum or 10 Ethereum).

So if you send someone 3 Ethereum tokens, they would have the same value as if you sent them 4 Ethereum tokens – there’s no difference.

Non-fungible Ethereum tokens – which include things like CryptoKitties – are unique and distinguishable from other units (there’s only one specific CryptoKitty for sale at any time).

You can’t break a non-fungible token down into smaller parts and mix it with other tokens to make new ones that are indistinguishable from the originals.

Although Ethereum’s ERC-20 standard is explicitly designed for fungible Ethereum tokens, it also provides a basis for Ethereum non-fungible tokens. Hence, there isn’t much difference between the Ethereum interface for fungible and non-fungible Ethereum tokens when you’re developing software.

What About Smart Contracts?

On Ethereum, you can build applications where your application, money, shares, votes, or messages are stored everywhere instead of being stored on one computer. And you can make them do things automatically.

Ethereum calls this “smart contracts,” but it means a computer program that can control a shared resource, like money.

Ethereum tokens are digital assets that can have a variety of values attached to them. They are fungible and transferable via public blockchain transactions in the network.

For example, Ethereum has a token called ‘Golem’ (symbol: GNT). 

First, you agree on a price you’ll pay in GNT, then when the job is done, the person who did the work will get paid their share automatically. And they don’t need to worry that you won’t transfer the money because Ethereum tokens are guaranteed to work.

Ethereum has two kinds of ‘accounts.’ One kind is like a Bitcoin account; this is where your Ether is stored (Ether is Ethereum’s currency). The other kind of account is like an Ethereum token address — this is what controls all the Ether attached to it.

This second type of account also lets you do useful things like ‘transfer’ money, which allows you to send it anywhere in the world.

Wrapping Up

So Ethereum tokens are a new kind of business, and nothing stops you from making one yourself! With these tokens, you can give or sell ownership in some projects or even let people buy access to some service that’s distributed across many computers. Ethereum tokens are very flexible.

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