What Is A Smart Token and How It Works

What are Smart Tokens?

Smart tokens are a type of digital asset or cryptocurrency that have additional functions beyond simple transactions. These tokens are built on blockchain platforms and often incorporate smart contract technology that allows them to execute pre-defined logic and conditions autonomously. 

Smart tokens can have a variety of features, such as programmable transaction rules, automatic market making, token conversion, and even governance capabilities. They are designed to be versatile and adaptable, enabling dynamic and customizable interactions in a decentralized ecosystem. 

Smart tokens play a critical role in decentralized finance ( DeFi ), enabling innovative financial instruments, liquidity pools, and decentralized exchanges to operate efficiently and securely. Examples of smart tokens include stablecoins such as DAI, automated market maker ( AMM ) tokens such as Uniswap's UNI, and governance tokens such as Compound's COMP.

How Smart Tokens Work

Smart tokens work by integrating smart contracts which combine all the information needed to authorize transactions in three layers, including the following.

• First: assets or sources of value, such as digital wallets.
• Second: a set of pre-defined rules determined by the token issuer, which determine who has access to the asset, under what conditions, and when. For example, companies can grant access rights to data providers at the end of each month if their services are used.
• Third: states that track token value based on established rules. For example, it records payment of the entire bill amount for data services and adjusts the balance accordingly.

Smart tokens also contain enriched data, including partner identity and invoice details. The core concept is that tokenization renders illegally intercepted payment authorization data worthless, as it is replaced by tokens. This ensures that the data remains hidden in plain sight.

Bancor, a decentralized trading protocol, introduced one of the earliest popular standards for smart tokens. In 2017, the company launched its own “smart token” that leverages smart contracts to facilitate direct convertibility within it.

The main use case is very simple: a token that can be bought or sold directly through its own smart contract without the need for a suitable exchange or counterparty. This facilitates direct on-chain token transactions, which differs from typical decentralized exchange ( DEX ) interactions.

Also Read:

What is a Liquidity Provider Token (LP Token)?

What are Utility Tokens?

What are Governance Tokens?

DISCLAIMER : This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.