This post is part of a series on how everyday investors can understand the word token in the context of blockchain networks.
The word "token" is most widely used to reference a type of crypto asset, or asset issued on a blockchain network. You might have heard someone talk about the "DOGE token," a "token for this new project," or a non-fungible token (NFT).
But this use of the term does not define it. In the context of blockchain networks, tokens are nothing more than a technical primitive. Specifically, they are data entries in a blockchain-native ledger. Assets like those mentioned are tokens, but token is not limited to those assets.
This article reframes the word token in exactly this way: as the technology, not as the asset moniker. Read on to take your understanding of the word token a technical step further.
Tokens exist in the context of blockchain networks
Blockchains are distributed computers. Just like a typical computer, they can run different programs. One of the most common is the token program, also known as a token standard.
A token standard outlines how to create a new token and serves as a ledger system on the blockchain. It typically gives you a set of metadata you can set: a name, a symbol (similar to a stock ticker), a circulating supply, and a number of decimal places. Built into the program is the ability to transfer tokens from one address to another on the network. It keeps track of who owns how much of the token, along with the other associated metadata.
Token standards outline how tokens should operate on the blockchain. Because they are blockchain native tokens benefit from many of the general advantages of blockchains. This makes this token ledger technology, 24/7 and accessible from anywhere.
Tokens are just records
A token is just a record in a ledger. In general, records in ledgers are meant to represent something. The record itself doesn't equate to value. It is just there to keep track of where value is at any given time.
In 2017, there was something called the Initial Coin Offering (ICO) craze. During this period, hundreds of projects raised billions of dollars by selling tokens directly to the public. Many of the projects that raised money didn't execute on the vision they sold. The lack of accountability led to widespread fraud and losses for everyday investors. This showed how easy it is to create tokens. It also showed that a token on its own has no value.
This underscores an important truth about the technology. Tokens are just records, nothing more. Generally, any fundamental value they have will be derived from something external.
Tokens are flexible
Typical ledgers are very structured. This is in general a positive attribute for ledgers to have.
Tokens are also ledger technology. However, tokens are very flexible. There is minimal metadata for a given token standard which can then be extended as developers see fit. The underlying immutability of the blockchain means that a given token will follow this base token standard structure. This promise of immutability then allows for tokens to be left completely open otherwise.
In the case of a typical ledger, concerns about mutability and incompatibility meant that ledgers were always rigid structures including associated metadata. However, the base security and structure of a blockchain allows for token to be more open and flexible unburdened by this need for rigidity.
Let's review two of the most popular examples of tokens being flexible ledger primitives.
Flexible tokens on Ethereum
The ERC-20 token standard is the most widely used token standard on Ethereum. It defines the minimum functionality a token needs: transfers, balances, and approvals. From there, developers can layer on additional capabilities through extensions.
Two common examples are ERC-20 Burnable and ERC-20 Votes. ERC-20 Burnable adds the ability for token holders to permanently destroy their own tokens, reducing the total supply. This is useful in systems where tokens are meant to be consumed, like redeeming a token for access to a service. ERC-20 Votes adds governance functionality, allowing a token to track voting power over time. Token holders can delegate their voting power to another address, and the contract records historical snapshots so that votes can be tallied at specific points in time. This is the foundation behind many decentralized governance systems where token holders vote on proposals.
Flexible tokens on Solana
Solana takes a different approach to extensibility. Rather than layering separate smart contracts on top of a base token program, Solana introduced a new token program called Token-2022, also known as Token Extensions. Token-2022 supports all of the same base functionality as the original token program but adds a suite of optional, built-in extensions that token creators can enable at the time of creation.
Two notable extensions are confidential transfers and permanent delegate. Confidential transfers use zero-knowledge proofs to encrypt token balances and transfer amounts onchain. The tokens still move through the same ledger, but the specific amounts are hidden from public view. This is relevant for businesses that want to manage payments or treasury operations onchain without exposing sensitive financial details. Permanent delegate grants a designated authority the ability to transfer or burn tokens from any account holding that token. This is a powerful tool for regulated assets, like stablecoins, where an issuer may need to freeze or reclaim funds to comply with legal requirements.
Whether through Ethereum's extension model or Solana's built-in extension system, the underlying point is the same: the base token is intentionally simple, and the real power comes from how it can be extended. Tokens are not fixed in what they can do. They are a flexible primitive that can be shaped to fit a wide range of use cases, all while remaining entries in a ledger on the blockchain.
Conclusion
Tokens are entries in a ledger on the blockchain. Blockchains are always running and accessible everywhere. This, combined with a ledger, makes for a powerful technological primitive. You can do anything you would do with a typical ledger while only being bounded by the rules of the blockchain.