What Is A Token?
A token is a thing or symbol serving as a visible or tangible representation of a fact, quality, or feeling. A token can be used to purchase products or services, tokens are usually presented as a gift or included in a campaign. Cryptocurrency tokens are a sort of cryptocurrency that anyone may develop without much technological expertise or experience. Tokens are built on existing blockchains, Ethereum is the first blockchain to have the function of developing tokens based on the standard we call the ERC20 standard. We now have numerous blockchains where tokens can be created based on the blockchain standards, examples of these standards for developing tokens are ERC20, ERC721, ERC1155, BEP20, BEP2, BEP721, and a lot of other blockchains. There are more than 19,000 cryptocurrency tokens today.
Although cryptocurrency tokens are frequently used to raise money for crowd sales, they can also be employed in other situations. Typically, the initial coin offering (ICO) process is used to produce, distribute, sell, and circulate these tokens. Tokens are sold through an initial coin offering. Initial coin offering is the worth of these tokens that are set on deployment and sold to an exclusive number of investors. Companies that deal with cryptocurrencies and seek to raise capital to develop tokens. These tokens can be bought by investors with an interest in the firm. Cryptocurrency tokens can be used to represent a lot of things (products), both physical and digital, this can be art, music, real estate and literally anything. The value of these tokens may or may not equate to the value of the item it represents. Investors can keep these tokens in their possession as a representation of a stake in the cryptocurrency company or for commercial purposes such as trading or making purchases of products and services. Some of these tokens can also be a reward for holding a particular cryptocurrency for a period of time. Some of these tokens are used in yield farming also known as Decentralised Finance Staking(DeFi Staking). Cryptocurrency tokens can also be used to represent stocks in a company.
What Are Differences between Cryptocurrency Coins and Cryptocurrency Tokens?
A cryptocurrency coin is the native coin of a blockchain, it is the store of value and represents the blockchain. Examples of cryptocurrency coins are Bitcoin, Ethereum, Solana, BNB, etc.
- A cryptocurrency coin operates only on its blockchain, the blockchain records all transactions involving its native cryptocurrency coin.
- Cryptocurrency coins have real monetary value, Bitcoin was intended solely to replace existing currency. Today, you can buy goods and services from a variety of significant corporations with cryptocurrency coins.
- Cryptocurrency coins can be mined. Mining is the process of getting rewards for securing and validating transactions in the cryptocurrency network also known as the blockchain.
Whereas a Cryptocurrency token is a value built on the blockchain, this can have a value or just a literal representation of an asset. These tokens are incorporated in self-executing computer programs or codes known as Smart Contracts and they function without the assistance of a third-party platform after deployment and can’t be changed after deployment. Some of these tokens can be fungible and traded, they can also be used to represent things like loyalty points, commodities, and even other cryptocurrencies they are pegged to.
Types of Cryptocurrency Tokens
- Utility Tokens
- Security Tokens
- Non Fungible Tokens
- Payment Tokens
1. Utility Tokens
Utility tokens are tokens that are developed for several uses, they serve a particular purpose or purposes. Utility tokens perform specific purposes in an ecosystem. These tokens give privileged services to token holders and are not considered investments because they are speculative and serve more as promotional tools. These tokens enable users to carry out certain actions on the network. Utility tokens are not coins that can be mined. They are typically pre-mined and distributed to investors during ICOs (Initial coin offerings). Most Altcoins are utility tokens and examples of utility tokens are Basic Attention Token (BAT), Chainlink (LINK), Zilliqa (ZIL), Aurora (AOA), etc.
2. Security Tokens
Security tokens are digital tokens that represent ownership rights or asset value transferred to a blockchain token. Tokenization is used to establish a security token. Security tokens are blockchain-based digital versions of traditional securities. These tokens could represent fractional ownership of any valued items, such as an automobile, real estate, or corporate stock and equity. Security tokens don’t have a monetary value. A utility is not required for security tokens. A security token denotes ownership, most typically a stake of the corporation producing the token. The idea is the same as purchasing stocks on a typical stock exchange.
3. Non Fungible Tokens (NFTs)
A Non Fungible Token also known as NFTs is a digital art that ranges from art, music, digital assets, videos, and real estate to anything digitally valuable. Non Fungible Tokens are tradable online on famous marketplaces like OpenSea, Rarible, LooksRare, Binance amongst others. These unique digital arts are minted on these Marketplaces with Meta-data describing the uniqueness of each art. The owner of this art creates a collection and distributes this art at an initial price outside the marketplace (Primary Marketplace). The investors or buyers perform some tasks to get these tokens (digital art) at the price on the primary market which is lower than the price set when minted on the secondary market which is known as the NFT ground price. These Investors that get this art at the primary marketplace are known to be whitelisted. Examples of famous NFT collections are Bored Ape Yacht Club, Mutant Ape Yacht Club, Cyber punks, Azuki, etc.
4. Payment Tokens
Payment tokens and cryptocurrency are used synonymously. Payment tokens may develop the essential functionality and become accepted as a mode of payment over time in specific instances. Some of the most well-known cryptocurrencies are payment tokens. These include Bitcoin, BNB, Ethereum, stable coins like USDT, and USDC that are pegged with the USD price and numerous other cryptocurrencies that are constructed on their own blockchain and may be used to make payments. There are other popular cryptocurrencies that have proven to be authentic coins, they are also used as payment tokens. Cryptocurrency coins that are reliable are recognized as payment tokens, especially cryptocurrencies that are less volatile.
In summary, cryptocurrency tokens are very important in cryptocurrency and they are mostly misconstrued with cryptocurrency coins which are the native currency for blockchains. Tokenization of assets is common these days and these assets are not constrained to digital assets alone as physical assets like real estate and physical products are tokenized.