There is hardly a person today who has not heard of cryptocurrencies and blockchain. Recently, more people are coming across crypto tokens and blockchain technology. They can be found in games, in the crypto space, in investments, and many other places. However, many people are unsure of what a crypto token is and often confuse it with a crypto coin.
Crypto coins and crypto tokens are not the same concepts because they perform different functions and purposes. What exactly are crypto tokens and how do they differ from cryptocurrencies like Bitcoin or Ethereum? Read on to find out.
What are crypto tokens?
We’ll start with the basics so that newcomers to the field of cryptocurrencies and blockchain can better understand the topic. It will also help to get a clearer picture of the difference between coins and crypto tokens.
For simplicity in the cryptocurrency community, crypto coins and crypto tokens are used as fungible. The real difference is in the way they are created, where a crypto coin uses its own blockchain, and a crypto token is built on someone else’s blockchain infrastructure.
Thus, a crypto token is an accounting unit used to represent a digital balance in an asset. Crypto tokens are accounted for in a database built on blockchain technology and are accessed by special applications using digital signature schemes.
Simply put, a crypto token is a digital asset created on a blockchain network. Ethereum is the most popular platform for building crypto tokens, and many digital assets have the ERC-20 token standard. However, it is not the only platform and token standard, there are many others, but they are all less popular than Ethereum.
In general, anyone can create a crypto token on a blockchain network. However, you will need to gain more info about the cryptocurrency that will be the basis of the new digital asset.
How do crypto tokens work?
A crypto token is a digital unit of various cryptocurrency projects. It would be fair to say that most tokens represent a virtual share with the possibility of being exchanged into different cryptocurrencies and crypto coins, or having access to platform features in the future. To understand how a crypto token works, it is necessary to make a comparison with crypto coins and highlight a few key points:
- While crypto coins are decentralized and issued by different computers, tokens are built by the management of one or more organizations. There are exceptions, but for the most part, all transactions are fully controlled because transactions often create obligations.
- The second major difference is their worth or the factors that determine it. For instance, while the value of Bitcoin is directly dependent on supply and demand, the worth of Aptos is determined by the assets invested in it.
- Bitcoin and other crypto coins operate on their own blockchain, while tokens are based on the blockchain of other cryptocurrencies. Simply put, tokens have a wider range and smaller scale of uses than Bitcoin or similar digital assets.
So, tokens can be issued either centralized (controlled by a single organization) or decentralized (controlled by a predetermined algorithm). Transactions can also be processed and accepted centrally.
More about smart contracts
A lot of dApps run on the Ethereum blockchain. Ethereum is also the most popular platform for creating tokens, and it supports smart contracts, so this aspect should also be discussed.
The smart contract technology was first applied to the Bitcoin blockchain, but because of limited scripting language, it was only suitable for financial transfers. Currently, smart contracts govern the execution of agreements between users. When an appropriate transaction takes place on the network, the execution of the prescribed actions is activated.
Tokens can be purchased either at the ICO as well as after an IPO on the exchanges, where the price is determined by the supply and demand ratio. When it comes to ICOs, smart contracts protect investors and redistribute the money raised according to pre-determined rules.
Why are these assets important?
Tokens are designed to simplify and facilitate transactions between parties and to speed up the transaction process using blockchain technology. So, why is this digital asset so important? Let’s look at a few key points:
- It is possible to create many projects on the network, which will offer a variety of services. This will allow the creation of a database in the blockchain, and the info cannot be changed or deleted.
- With the rich functionality of decentralized applications, any project can be implemented.
- Minimal risk can be achieved due to easy interaction between creators and users on the same network. In addition, it can help to optimize the services offered to the user.
Buying and storing tokens is similar to buying and storing other crypto assets. They can also be used for different purposes. For instance, investors who have purchased these assets can make large profits with minimal investment.
What are tokens used for?
There are a large number of situations where these assets can be used. It can be as much about accessing the platform’s services with utility tokens as an investment. We need to look at all the existing types of these assets to better understand the scope:
- Utility tokens. Reflect some value within the online platform’s business model (utility tokens represent reputation, points for certain actions, and in-game currency). Simply put, utility tokens give the right to use the company’s services.
- Security. Created to simplify the work of investors and are essentially shares in a company. They certify ownership and provide the opportunity to receive dividends.
- Asset-backed. These are tokens that are backed by real, liquid assets. These can be goods/services, as well as oil and gold.
- Governance. Such an asset allows its owners to participate in the governance of the project. Owners are allowed to make changes to the work, participate in voting, and actively influence the progress.
- NFTs are characterized by their uniqueness, and they are not fungible with other units. NFTs are mostly used in virtual art and computer games.
If you want to invest in a new project and see potential in it, you can get the tokens offered as part of that product. Before buying any tokens, you should do a market analysis, learn more about the technology, and consider all the pros and cons of such an investment.