Those of you who have been reading about cryptocurrency and blockchain recently may have encountered the concept of crypto tokens. But what are they and how are they different from cryptocurrencies like Bitcoin? Keep reading to learn more!
In a technical sense, the word “token” just means a cryptocurrency or crypto-asset. However, it is increasingly being used to describe several more specific concepts. A cryptocurrency other than Bitcoin and Ethereum (although they are technically also tokens, just stay with us) is the first one to be described. Secondly, we can refer to certain digital assets that run on top of the blockchain of another cryptocurrency, such as many decentralized finance tokens (or DeFis). There are many ways that tokens can be used, from making decentralised exchanges possible to selling rare items in video games. Regardless, they all can be traded or held like other cryptocurrencies.
Confusing? We have a course which gives you great foundational knowledge on this whole mind-bending world of cryptocurrency, blockchain and NFTs.
Crypto Token Basics
You may need a refresher on what cryptocurrencies are before we compare tokens and coins. Similar to regular currencies like dollars and euros, people can exchange them with goods and services.
Cryptocurrencies are not regulated by government institutions like traditional money, and therefore, old-school, more traditional institutions involved with money often warn of the dangers of investing in cryptocurrencies. Are they correct? Or are they simply trying to protect their world against the highly driven, industry-disrupting new kid on the block? In cryptocurrency transactions, all transactions are recorded on a centralised ledger, the blockchain, that facilitates, records and monitors transfers between secure addresses. Tokens and coins are both digital assets used to transact on the blockchain.
What Is The Difference Between ‘Coins’ And ‘Tokens’?
It is common to see the words “coin” and “token” used interchangeably; however, they are different types of assets. The most significant difference between coins and tokens is where they are used. A coin is a unit of value that’s native to the blockchain it’s built on. For example, Ethereum is native to the Ethereum blockchain, while Bitcoin was made for the Bitcoin blockchain. The ownership of these cryptocurrencies is represented by “keys”.
The use of coins is common in everyday transactions, such as online shopping or sending someone cash. As soon as someone sends you bitcoin (if this does happen, wow…), the blockchain facilitates a transaction that reduces the other person’s balance and increases yours, completing the transaction.
In contrast, tokens aren’t part of the blockchain that they are operating on. More specifically, the Ethereum blockchain is home to many of the most widely used crypto tokens today. The Ethereum blockchain can be used to run and exchange other tokens. These include Tether, which is a cryptocurrency designed to mimic the value of the USA dollar, and Uniswap, a protocol for trading cryptocurrencies.
Crypto Tokens: How Do They Work?
Like money in a bank account, cryptocurrency coins are equivalent to digital coins. Even though you own that amount of money, it is not tied to any specific currency bill or coin. When you withdraw from your account, you receive a tangible representation of that value. As opposed to this, tokens are yours as an individual asset. In arcades, for example, game tokens represent claims to play a particular game.
The token “leaves” your account if you send one to someone. Thus, tokens can also represent ownership or facilitate the transfer of property, such as with NFTs (non-fungible tokens). NFT tokens act as “deeds” that represent your claim to a particular piece of art or digital artifact.
Token exchanges, in contrast to coins, use a system called “smart contracts.” These Blockchain applications can be programmed to execute trades or transfers based on certain conditions. Blockchains that serve as platforms for tokens have a technical standard that defines smart contracts. An example is Ethereum’s ERC-20 standard.
How To Get Your Hands On Crypto Tokens?
The most common way to obtain crypto tokens is through cryptocurrency exchanges. A large number of different coins and tokens can be traded on these large-scale platforms. Using these tools, you can trade different cryptocurrencies and regular currencies, manage multiple wallets, check the value of each crypto, and send and receive money easily.
Opinions are vastly divided, from people who do trade with cryptocurrency on which currency and platform to use. So do lots of research or take our Crypto & NTF’s Blockchain course to get a thorough foundation before you venture into this field.
Alternatively, tokens can be issued through various other applications. For example, some mobile apps offer crypto tokens to users who are active users of their services. The tokens are usually used to facilitate in-app purchases between users.
What Are Some Examples Of The Type Of Tokens?
While researching cryptocurrencies, you’ll encounter the word “token” a lot, so it’s helpful to know a few of its common connotations. Besides the big picture definitions in the section above, there are some cryptoasset categories that are actually referred to as “tokens.”
Here are a few examples:
DeFi tokens. In recent years, a new set of crypto-based blockchain protocols has emerged attempting to reproduce traditional financial-system functions (lending, saving, insurance, trading). In addition to performing a variety of functions, these protocols issue tokens that are tradable and can be held as a cryptocurrency.
Governance tokens. A specialised token that allows owners to have a say in the future of a protocol or app, which are decentralised and do not have boards of directors or any other central authority. Users of the popular savings protocol Compound, for example, are given a token called COMP. This token gives holders a vote on how the protocol will evolve. More COMP tokens, more votes.
Non-Fungible Tokens (NFTs). An NFT represents ownership rights to a unique digital or real-world asset. By using them, you can make it more difficult for digital creations to be copied and shared (something everyone familiar with Torrent sites full of the latest movies and games understands). Furthermore, they’ve been used to sell limited edition digital artworks or unique virtual assets like rare items in video games.
Security tokens. New asset classes like security tokens are aimed at being the crypto equivalent of securities like stocks and bonds. They are primarily used to sell shares of companies (like shares and fractional shares sold via conventional markets) or other enterprises (for instance, real estate) without the need for a broker. Major companies and startups have been reported to be exploring security tokens as a potential fundraising alternative.