In one sentence
A token is a unit recorded and managed by a smart contract on an existing blockchain, which can stand for almost anything — a vote, a ticket, a game item or a claim on something held elsewhere.
How it works
A blockchain's native coin, such as ether on Ethereum, is built into the base protocol. A token is not. It lives inside a smart contract, which at its simplest is a table: this address holds this many units. "Sending" a token means calling the contract's transfer function, which updates the table if the caller is allowed to.
Standards make tokens work with any software that knows the standard. ERC-20, proposed in November 2015 and defined in EIP-20, describes fungible tokens, where every unit is interchangeable; it specifies functions such as balanceOf, transfer and approve. ERC-721, finalised in 2018, describes non-fungible tokens (NFTs), where each unit has its own identifier. Other standards combine both ideas.
Because anyone can deploy a contract, anyone can create a token and give it any name, symbol or logo. A familiar name therefore proves nothing; a token is identified by the address of its contract.
What a token represents outside the chain — a membership, a ticket, a claim on reserves — depends on promises made by its issuer and on the law, not on the code.
A simple example
A theatre issues 500 tickets as non-fungible tokens, numbered 1 to 500. The contract records which address holds ticket 217. When the holder passes it to a friend, the contract updates the record. At the door, the friend proves control of the address by signing a short message, and the theatre checks the record.
Common misconception
Misconception: My tokens are stored inside my wallet.
In fact: Tokens exist only as entries in a contract on the blockchain. The wallet stores the keys that can sign transactions telling the contract to move them. Likewise, an NFT usually records ownership of an identifier that points to an image stored elsewhere — not the image itself.
Where you meet it
- Stablecoins, which are tokens.
- NFT collections, game items and voting systems.
- Block explorers, which list token transfers separately from transfers of the native coin.
- The EU's MiCA Regulation, which classifies crypto-assets including many tokens.
Related cards
Sources
This card explains a technical concept for general education. It is not a recommendation to acquire, sell or hold any crypto-asset, and it is not financial advice.