Smart tokens are simply regular tokens that not only transmit value they contain but also all the information needed to execute a transaction simultaneously.
What Is a Smart Token?
If tokens are how the crypto sector now refers to all user-generated value-containing assets that are compliant with the various standards on a blockchain network, then “smart tokens” are simply regular tokens that not only transmit value they contain but also all the information needed to execute a transaction simultaneously.
One way to differentiate regular tokens from smart tokens is that the former only transmits value, while the latter additionally contains in-built programmability to manipulate that value.
As the term suggests, smart tokens do this by incorporating smart contracts that can use all the information needed to authorize a transaction at once in three layers:
- The asset or the source of value. For example, this could be your wallet.
- An accompanying set of rules, which are determined by the token issuer. These rules define who has access to the asset, when, for which conditions. For example, it can define your data provider as having the rights of access, at the end of every month, if you have used their services.
- A state, which tracks the token value by the set of rules. For example, the state will record that you have paid the full amount of the invoiced data bill, and adjust your balance accordingly.
Smart tokens as such will contain enhanced information, such as counterpart identity, and invoicing data.
The central idea is this: when tokenized, unlawfully intercepted payment authorization data is rendered valueless because it simply isn’t there; it is replaced by a token. This means the data can, in effect, hide in plain sight.
The Bancor decentralized trading protocol created one of the earliest popular standards for smart tokens; in 2017, the company launched its own “smart tokens” that used smart contracts to implement direct convertibility within them.
Its use case was simple: tokens that could be bought or sold at any time directly via their own smart contract, without needing to go through an exchange or find a matching exchange. This means a direct on-chain token interaction, instead of Dapp interactions like on a typical DEX now.
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