Heard people talking about tokens but don’t really know what they are? In this blog we will simply define and explain them.
A Simple Definition Of A Token
A token is another word tied to cryptocurrency. It has in recent times taken on two more specific meanings.
- any cryptocurrency other than Bitcoin or Ethereum.
- a digital asset that runs on top of another cryptocurrency’s blockchain i.e. a token coined by a DeFi (decentralized finance) app on the Ethereum blockchain.
He Difference Between Crypto Coins And Tokens
Notwithstanding the fact that a token has come to be used as a term for many cryptocurrencies, there is one critical difference between the two. A coin is cryptocurrency, you use it to buy a token. A token is a digital asset that you then use to transact with a decentralized protocol on the blockchain. It’s a bit like going to a theme park that operates solely on the use of tokens. You have to go to the cashier first at the park entry where you can buy $50 worth of tokens to use on rides, amusements and food within the park.
How Do Tokens Work?
Tokens are merely a type of cryptocurrency which can be used to buy and sell goods and services or perform other functions on the blockchain. Each blockchain issues its own token e.g. Bitcoin, Ethereum, Monero. Bitcoin tokens are a pure cryptocurrency in that they have no other functionality. Ethereum tokens are the native token on the Ethereum blockchain which was purposefully built to allow enterprises to do business on a decentralized platform. These enterprises then issue their own tokens to interact with them. These tokens are effectively shares in their company. They may also be used for any number of purposes such as investing, gaming, gambling or accessing online content.
How Are Tokens Created?
Tokens are created by companies on the blockchain who want to raise money and are made available through an Initial Coin Offering (ICO). This is similar to an Initial Public Offering (IPO). Investors may buy these tokens and trade them, or retain them to keep a stake in the company or use them to buy the company’s goods and services.
Different Types Of Tokens
Remember that technically Bitcoin and Ethereum are tokens, just like all other cryptocurrencies. But in wider usage, tokens normally refer to a digital asset issued by a company on the blockchain. There are however a number of different kinds of tokens you may encounter.
DeFi tokens – The world of decentralized finance allows users to borrow and lend money, buy and sell cryptocurrencies, invest and do everything else similar to traditional markets. These DeFi apps run on the Ethererum or similar blockchains and use their own tokens which can be traded or retained.
Governance Tokens – These are specific DeFi tokens that give the holder a voice in the future direction of a protocol or app. The more tokens acquired, the bigger say the holder would have.
Security tokens – These are relatively new tokens that are designed to be used in the same way as shares or bonds. They are issued and sold as shares in a decentralized protocol without the need of a broker. They also come with the benefits of reaping dividends.
Non-Fungible Tokens (NFTs) – These tokens represent ownership of a unique digital or physical asset, often digital art, sports memorabilia or even a chip to be used in a video game. They can be bought, sold and traded and some have appreciated enormously in value.
Asset tokens – also known as securities, asset or asset-backed tokens are digital rights to a physical asset and backed by that asset. It may be gold or other precious metals, oil or similar commodities, real estate or any other asset. It is a way of tokenizing physical assets on the blockchain.
Utility tokens – A bit like a digital voucher, these provide access to a product or service offered by the issuer. They are unregulated and like a real voucher, don’t gain in value, hence are not an investment option.
Payment tokens – These are used for buying and selling goods on the blockchain without a third party. This includes most cryptocurrencies including Bitcoin and Ethereum.
Stable tokens (or stablecoins) – These are tokens which are tied to a fiat currency such as the US dollar or the Euro to improve their stability. Some may be tied to gold or other precious metals, oil and other commodities.
Want To Know More About Tokens?
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