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Adetutu Gbangbola
Adetutu Gbangbola

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Understanding Token Contracts in Blockchain For Non-Techie

Table Of Contents

    * Introduction
    * [Chapter 1](Tokens: Digital Assets on the Blockchain)
    * [Chapter 2](What are Token Contracts?)
    * [Chapter 3](The Rise of Malicious Tokens)
    * [Chapter 4](Understanding Token Value)
    * [Chapter 5](Case Scenario: Dealing with a Malicious 
    * [Chapter 6](Conclusion and Call to Action)
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Hey there! The world of blockchain is expanding at an incredible pace, and it's got people buzzing with curiosity. But let's be honest, all the jargon and techy terms can make it feel like diving into a maze, especially if you're not a tech whiz. Well, fear not! In this article, we're here to break it down for you. We'll explain what tokens and token contracts are all about, and we'll even give you some tips on how to spot and safeguard yourself against fraudulent tokens. So, let's get started and demystify this exciting world together!.

Chapter 1: Tokens: Digital Assets on the Blockchain:

Tokens refers to digital assets existing on the blockchain network. For example, cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) are known as tokens. Non-fungible tokens (NFTs) is also a token, giving user full ownership of its digital assets examples are artworks. In this article, we will primarily focus on crypto-tokens.

Chapter 2: What are Token Contracts:

Token contracts are smart contracts deployed on the blockchain. They serve as digital programs that define the rules for managing tokens, ensuring secure and transparent transactions within the network.

Chapter 3: The Rise of Malicious Tokens:

The crypto market boasts thousands of tokens, with over 22,000+ listed on coinmarket count. Unfortunately, as cryptocurrencies gain popularity, so does the emergence of malicious tokens. While tech-savvy individuals can conduct extensive research, such as reviewing GitHub codes, non-technical users need not worry as there are alternative methods to ensure token legitimacy.

It's important not to be deceived by the nominal value of a token, as a token with a value of $0.00001 doesn't necessarily mean that $1 is more valuable. Factors such as total supply and market capitalization play a crucial role in determining the value of a token. In some cases, a token with a lower nominal value might have a larger total supply and market cap, making it a more valuable asset compared to another token.

Chapter 4: Understanding Token Value and Safeguarding Investments

In the world of cryptocurrency, it's crucial to understand the true value of a token and take steps to protect your investments. Let's consider a scenario to illustrate this point.

Imagine a token creator who mints 1000 tokens and initially releases 500 tokens to users for purchase. At the time of purchase, the token's value is $1 per token. The remaining 500 tokens are retained by the token admin.

To clarify, "minting", Imagine you have a digital currency that you want to create and keep track of using blockchain. Minting is the process of creating new units of that digital currency. Think of it like a printing press that creates physical money. In the blockchain world, instead of printing physical money, minting involves generating new digital tokens or coins.

However, in the unfortunate case where the token creator turns out to be malicious, they could secretly mint an additional 500 tokens, adding them to their existing 500 tokens. This increases the total supply to 1000 tokens. Subsequently, when the admin starts selling their own tokens, the value of the tokens initially purchased by users begins to decline from the original $1.

To protect yourself as a user, it is of utmost importance to conduct thorough background checks before purchasing a token. By conducting due diligence, you can identify potential risks and avoid falling victim to such manipulative practices.

Chapter 5: Case Scenario: Dealing with a Malicious Token:

Mr. A had 80 USDT in his wallet, and one day he woke up to find that the tokens had disappeared. Mr. A was confused about what had happened. Here's what occurred behind the scenes:

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Previously, Mr. A had 100 USDT in his wallet. Some time ago, he purchased a malicious token called REMY (just for illustration purposes) worth 20 USDT. During the token purchase process, Mr. A interacted with a smart contract. The smart contract had a function called the APPROVE FUNCTION, which allowed the contract to approve tokens on behalf of the user. When Mr. A bought 20 USDT worth of REMY, it was expected that he would still have 80 USDT in his wallet.

Before the smart contract could provide Mr. A with the REMY tokens he purchased, it needed to deduct the 20 USDT from his wallet. By interacting with the contract, Mr. A needed to approve the smart contract to access funds from his wallet, which currently held 100 USDT.

In blockchain, the "approve" function allows you to give permission to a smart contract to interact with your tokens. This interaction could involve transferring, spending, or managing your tokens in some way. When you use the "approve" function, you specify the smart contract and the amount of tokens you want to authorize them to use. It's like saying, "I approve Jane to transfer 10 tokens from my wallet to another person."

In Mr. A's situation, the "approve" function determined the amount he authorized the smart contract to spend on his behalf. The smart contract might have approved 80 tokens out of the 100 and then released the 20 USDT he wanted to buy at that moment. This meant that the smart contract had reserved 60 USDT for Mr. A in case he wanted to buy another token in the future.

However, since REMY was a malicious token, its creator had access to the remaining 60 tokens and could withdraw them. That's what happened in Mr. A's case, where he discovered his money was missing. You might wonder why the smart contract couldn't approve the exact amount needed for each transaction. If it did, you would have to pay a gas fee for every transaction. Since the smart contract had already approved tokens on Mr. A's behalf, he could simply use the approved tokens for future transactions.

Chapter 6: Conclusion and Call to Action:

As decentralized finance continues to grow and evolve, it's crucial for all of us to wrap our heads around token contracts and their significance. When you have a good grasp of how tokens work, you can lower the chances of becoming a target for scams and make smarter investment decisions. Armed with knowledge and a keen eye for detail, you'll be able to navigate the exciting world of blockchain with confidence and peace of mind. So go out there, make informed choices, and let the power of blockchain technology work for you!.

Top comments (2)

parth51199 profile image

What are the risks of using token contracts?

adetutu777 profile image
Adetutu Gbangbola

Thanks for your interest in my article, one common risk is the potential for token contract hacking. However, thorough research and verification can help mitigate risk.