Digital tokens are entities that represent a given assigned utility or asset. The tokens reside on a blockchain structure and can be used as representations for any tradeable and fungible assets. The assets could be loyalty points, commodities, licenses, property rights, a house, a car, among many other things. Whoever holds the digital token will also hold the right to claim the asset that underlies the token.
So, for instance, if a company has issued its stocks in the form of digital tokens, holder of these tokens will have the right to claim the ownership of the underlying stocks.
Tokens can be exchanged among people. All the transactions that will take place using the digital tokens will be recorded on blockchain. This will help in keeping the token ownership secure and transparent, while also ensuring that there is no centralized entity that’s regulating the process. This saves time and money for everyone involved. The usability of digital tokens is so great that they can even be used by a company to manage its complete dividend payment process.
As you know by now that digital tokens are based on a blockchain, colored coins are digital tokens based on the Bitcoin blockchain. In every bitcoin transaction, there is an optional text field provided. This field can be used as an identifier for assigning more meaning to a normal bitcoin transaction, that is, let the transaction represent more than just transfer of bitcoin. Essentially what’s happening here is that the identifiers are being used for representing bitcoin as a real-world asset outside the Bitcoin blockchain. These bitcoins, that represent assets outside the Bitcoin blockchain and those of the real world, are called Colored Coins.
Digital tokens that are based on the Ethereum blockchain are known as Ethereum Tokens. Ethereum blockchain is an advancement over the Bitcoin blockchain. It not only records, verifies, replicates transaction information across nodes all over the world, but it is also capable of running computer programs known as smart contracts identically on the global network of nodes. This capability of Ethereum blockchain enables Ethereum tokens to represent assets, and in addition it also allows the running of thorough computer applications using the Ethereum tokens.
Due to the nature of the Bitcoin blockchain, every single generated coin can be uniquely identified along with its transaction history. The smallest identifiable Bitcoin unit is called “satoshi” and depicts a tiny amount of 0.00000001 Bitcoin.
The inherent embedded identifiability and traceability of Bitcoin enables the implementation of additional ledgers on top of the existing Bitcoin ledger.
If numerous parties arrange and acknowledge to attach meaning to one particular satoshi by letting it represent another asset, they can subsequently use the Bitcoin blockchain to track ownership of this asset and its associated transactions in a decentralized and secure manner.
Assuming such an agreement has been reached, these tiny, identifiable, pieces of bitcoin (satoshis) can then be employed to represent and record assets. Such coins are called “colored coins”. Below is an illustration of colored coins procedure:
Building upon the established existing Bitcoin layer and utilizing colored coins makes it easy for users to implement additional asset layers on top of it. Using colored coins, therefore, saves time and ressources which would be necessary if a separate blockchain was set up.
Furthermore, colored coins benefit from the huge amount of hashing power that the Bitcoin network already possesses which in addition protects the Bitcoin blockchain against various types of attacks.
Ethereum tokens are units of digital currency that exist on the Ethereum blockchain. They can represent all sorts of value: customer reward points, IOUs, and video game currencies can all be represented as Ethereum tokens, along with more traditional forms of finance.
This are not the first form of digital currency capable of representing non-financial value. Similar programs have been developed that work by adding unique metadata to Bitcoin transactions, marking them as non-Bitcoin assets.
But unlike Bitcoin, the Ethereum blockchain supports a wide range of decentralized applications — giving Ethereum tokens an advantage over other digital tokens. For example, Ethereum is designed to support smart contracts. In fact, because it can function as a virtual machine, Ethereum is capable of running any type of application.
Ethereum tokens are easy and cost-efficient to make. In under ten minutes, they can be created using the platform’s free and open-source smart contract development tools. And you don’t have to build a wallet: the easy-to-use official Ethereum wallet is able to hold, send and receive Ethereum tokens of any kind.
Decentralization helps to make Ethereum secure. Because the record of transactions on a blockchain is distributed among its members, it is also highly tamper-resistant. Any attempts at fraud or manipulation can easily be detected.
Another great feature of Ethereum tokens is interoperability via APIs (application programming interfaces). This allows Ethereum applications to easily sync with other systems.
