This post is part of a series on how everyday investors can understand the word token in the context of blockchain networks.
"Token" is most widely used to describe a type of crypto asset, or an 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).
Tokens are a blockchain-native ledger system that can be spun up with minimal attention to underlying infrastructure. Their primary function is representing digital ownership.
What does that mean? A dollar bill is just a piece of paper, but it has value because the US government says so, and you own it because it's in your wallet. A file on a computer works similarly. You can create an infinite number of files, but some are clearly more important than others. It's the content that matters. A token works the same way. It's just an entry in a ledger, and you can create as many as you'd like. But a token has utility if the creator structures it that way. Tokens can be nothing, or they can conveniently convey ownership of, or a right to, something.
Concrete examples include protocol ownership, access and membership, capital formation, tokenization of real-world assets, and digital collectibles. This article reframes the concept of a token and walks through each of these use cases. Read on to take your understanding of the word a step further.
Tokens are used for protocol ownership and governance
Tokens can represent ownership in a protocol. Unlike a traditional company, where equity is managed through legal agreements and intermediaries, a blockchain protocol can use tokens to distribute ownership directly to its users. Holding a token can give you programmatic rights to vote on protocol upgrades or to accrue revenue from protocol operations via fee distribution. Holding the token conveys many of the same rights you would have holding a typical equity, except the method of interacting with the underlying entity is programmatic. If you hold your tokens anywhere, at any time, you can exercise your rights as a part owner of the protocol.
The AAVE token for the Aave protocol is an example of a protocol ownership/governance token. The token gives the token holders the right to vot on Aave Improvement Proposal(AIP) which will affect the direction the protocol takes. They can also get discounts when using the protocol for staking there AAVE.
Asset issuance and custody in the world of equities is a billion-dollar industry. It requires syncing ledgers, extensive registration, and many other processes that add overhead. Many of these challenges can be addressed with the use of newer, token-based issuance technology.
Tokens are used for access and membership
One of the simplest applications of a token is as a digital key. A token in your wallet can grant you access to exclusive products or experiences, no passwords required. This concept is known as "token gating." When you connect your wallet to a website, a program checks whether you hold the required token and unlocks content accordingly.
Retailers are already experimenting with this. Shopify, for example, supports token-gated commerce, where merchants can restrict access to certain product drops, discounts, or collections to customers who hold a specific token. The token effectively replaces a traditional membership card or loyalty login, except it's verifiable onchain and can even be transferred or resold.
Building membership systems is often complex. There are entire industries built around how to do this effectively. Tokens are an off-the-shelf option to make implementing this type of system more straightforward.
Tokens are used for capital formation and fundraising
Another use of tokens is fundraising. Because anyone can create a token and distribute it globally, tokens offer a way for projects to raise capital directly from their communities without traditional intermediaries like investment banks or brokerages.
This idea gained mainstream attention during the Initial Coin Offering (ICO) craze of 2017. During this period, hundreds of projects raised billions of dollars by selling tokens directly to the public. Many of these projects were little more than a whitepaper and a promise. The lack of accountability led to widespread fraud and losses for everyday investors. While the ICO era demonstrated the raw power of token-based fundraising, it also highlighted a critical flaw: there were very few protections for participants.
Since then, there have been attempts to fix this. Projects like MetaDAO are building fundraising platforms that attempt to address the problems of the ICO era. MetaDAO uses a model it calls "unruggable ICOs," where raised funds, intellectual property, and the ability to mint new tokens are controlled by market-driven governance rather than a founding team alone. If a project underperforms, token holders can raise proposals to return funds from the treasury. The idea is to keep founders accountable while still giving anyone the ability to raise capital from a global audience.
Tokens readily map to ownership of something. The outcomes of the 2017 ICO craze showed that base token programs alone aren't sufficient, but they can be the technical backbone of effective, open fundraising.
Tokens are used for...tokenization
Tokenization is the process of making the ownership of something trackable through a digital representation on a blockchain network. That digital representation is a token. Dollars, stocks, real estate, art, and even intellectual property can all be tokenized, meaning ownership of these assets is tracked and transferred through tokens rather than through traditional paperwork and intermediaries. This means they can be traded 24/7 from anywhere in the world.
Stablecoins are one of the most widely used examples. US dollars do not exist on blockchain networks by default, so issuers create tokens that represent them. These tokens are generally backed one-to-one, meaning the issuer holds the same number of US dollars as they put tokens in circulation. Instead of moving through bank transfers that can take several days, these tokenized dollars can be transferred nearly instantly on the blockchain where they have been issued.
The same idea applies to other asset types. Tokenized stocks trade 24/7 by definition and do not require a broker. Because tokens live on blockchains, tokenized assets can move globally, at any time, and interact with a wide range of onchain protocols without relying on traditional intermediaries.
Tokenized assets are effectively IOUs for the underlying asset. The value of the token is largely dependent on good provenance. If the issuer mismanages reserves, takes excessive risk, or loses access to the underlying, the token can trade below its intended value, or in the worst case become worth nothing. Understanding who issues a tokenized asset, how it's backed, and how it can be redeemed is as important as understanding the technology that moves it.
Tokens can be memes and NFTs
Memecoins and NFTs have been a big part of the story of tokens. For many they might've been the first time someone heard of tokens. In general, memecoins and NFTs use underlying token technology but they have no proven fundamental value themself. Tokens are just technology that can be used by anyone. No different than files on a computer or posts on social media. However, how the technology is used can vary a great deal.
Meme tokens are fungible tokens that derive their value primarily from community enthusiasm and internet culture rather than from any underlying utility or cash flow. Dogecoin is the most well-known example. They are speculative by nature, and many lose their value quickly.
NFTs, or non-fungible tokens, take a different approach. Unlike standard tokens, which are interchangeable with one another, each NFT is unique. This makes them well-suited for representing digital art, music, collectibles, in-game items, and other one-of-a-kind assets.
The value of these tokens is based purely on the value people attribute to them. There is no underlying business supporting this valuation. However, proponents of this use case often say that tokenizing a cultural moment has real value.
Conclusion
Tokens are a fundamental building block of the blockchain stack. At their simplest, they are entries in a ledger. But as we've seen, that simplicity is what makes them so versatile. Tokens can represent ownership in a protocol, act as digital keys for access and membership, serve as instruments for raising capital from a global audience, map real-world assets onto programmable rails, and give form to digital culture and collectibles.
Understanding tokens in terms of use cases can open up a clearer picture of what this blockchain primitive can actually make possible. The applications covered here are just a few examples, and as the technology matures, the ways tokens are used will continue to evolve.