Token has emerged as another application example of distributed ledger technology other than cryptocurrencies. It refers to digital crypto assets that represent a certain value or utility within a project ecosystem on an existing blockchain. Projects produced on Ethereum's smart contracts can be given as an example.
In this article, we will explain what distributed ledger technology is and how it works to better understand the concept of tokens. We will also cover the different types and uses of tokens.
What is Distributed Ledger Technology?
Distributed ledger technology (DLT) is a decentralized ledger that allows data on a network to be hosted and accessed in multiple locations. Distributed ledger technology (DLT) allows transactions between individuals to be replicated, stored and synchronized in a decentralized network. With DLT, data is distributed across multiple networks, not a central server. Participants who can access these networks can access and verify data.
When using DLT, data access, validation process and other updates are provided by the consensus mechanism created by the network users. DLT is used to record transactions that occur on the network, such as payments and transfers. Distributed ledger technology works differently from centralized systems used by different businesses and financial institutions. It is quite easy to interfere with the books used by these institutions. In addition, synchronization problems may occur if different versions of these central ledgers are released. In such cases, there is a risk of providing transactions with erroneous or incomplete information in central ledgers.
Distributed ledgers are not controlled by an authority. Instead, the participants or nodes (nodes) in the network have a copy of the data. This data is updated every few seconds. Network participants reach consensus through consensus mechanisms for records and edits on the ledger. DLT offers a high level of security. Distributed ledger technology also leverages cryptographic data and digital signature technologies. In this way, it is ensured that the transactions stored on the ledgers are correct.
The distributed ledger works as a peer-to-peer (P2P) system used to record transactions between individuals in multiple locations simultaneously. Distributed ledger technology uses cryptography and consensus mechanisms to allow users to create and share a copy of the same ledger. Thus, the need for a central database and authority is eliminated. DLTs include anonymous participants. At the same time, DLTs do not need any permissions. The information of all transactions that took place is shared between all participants through consensus mechanisms and recorded in the ledger. An example of DLT is the Bitcoin blockchain network. The Bitcoin blockchain network is considered a public and distributed ledger.
DLT also allows private ledgers to protect the privacy of data. The data of the transactions on the private ledger are shared only with the parties of the transaction. The consensus mechanism, on the other hand, is accomplished by adding a digital signature to the smart contract, rather than consulting the ledger participants.
What is Token?
Token has emerged as another application example of distributed ledger technology other than cryptocurrencies. It refers to digital crypto assets that represent a certain value or utility within a project ecosystem on an existing blockchain. Projects produced on Ethereum's smart contracts can be given as an example.
Tokens are digital assets that use the infrastructure of blockchain networks but do not have a network of their own. Tokens can be used for a variety of purposes, taking advantage of the security, transparency and decentralization offered by blockchain networks. Tokens are often associated with a particular project or service and benefit participants in that project's ecosystem.
What Are the Different Types of Tokens?
Tokens can be classified according to different properties and uses. The most commonly used token types are:
- **Payment Tokens**: These tokens are used as a means of payment in blockchain networks. Payment tokens are also called cryptocurrencies, which often have their own blockchain network. For example, cryptocurrencies such as Bitcoin, Ethereum, Litecoin are accepted as payment tokens.
- **Auxiliary tokens**: These tokens benefit participants in the ecosystems of projects running on a particular blockchain network. Utility tokens are usually generated and distributed through smart contracts. For example, tokens of projects such as Uniswap, Chainlink, Aave are considered utility tokens.
- **Security tokens**: These tokens are digital representations of traditional financial assets.