Ah, the "token": blockchain’s most powerful and most misunderstood tool.
A token is a representation of something in the blockchain. This something can be money, time, services, shares in a company, a virtual pet, anything. By representing things as tokens, we can allow smart contracts to interact with them, exchange them, create or destroy them.
Much of the confusion surrounding tokens comes from two concepts getting mixed up: token contracts and the actual tokens.
A token contract is simply an Ethereum smart contract. "Sending tokens" actually means "calling a method on a smart contract that someone wrote and deployed". At the end of the day, a token contract is not much more than a mapping of addresses to balances, plus some methods to add and subtract from those balances.
It is these balances that represent the tokens themselves. Someone "has tokens" when their balance in the token contract is non-zero. That’s it! These balances could be considered money, experience points in a game, deeds of ownership, or voting rights, and each of these tokens would be stored in different token contracts.
Note that there’s a big difference between having two voting rights and two deeds of ownership: each vote is equal to all others, but houses usually are not! This is called fungibility. Fungible goods are equivalent and interchangeable, like Ether, fiat currencies, and voting rights. Non-fungible goods are unique and distinct, like deeds of ownership, or collectibles.
In a nutshell, when dealing with non-fungibles (like your house) you care about which ones you have, while in fungible assets (like your bank account statement) what matters is how much you have.
Even though the concept of a token is simple, they have a variety of complexities in the implementation. Because everything in Ethereum is just a smart contract, and there are no rules about what smart contracts have to do, the community has developed a variety of standards (called EIPs or ERCs) for documenting how a contract can interoperate with other contracts.
You’ve probably heard of the ERC20 or ERC721 token standards, and that’s why you’re here. Head to our specialized guides to learn more about these:
ERC20: the most widespread token standard for fungible assets, albeit somewhat limited by its simplicity.
ERC721: the de-facto solution for non-fungible tokens, often used for collectibles and games.
ERC1155: a novel standard for multi-tokens, allowing for a single contract to represent multiple fungible and non-fungible tokens, along with batched operations for increased gas efficiency.