what is a crypto token (1)

Crypto 101: What’s a Token?

In this article Crypto 101: What’s a Token? We will talk about the Token concept. You might have heard the word token and coin when talking about cryptocurrency. These two terms that we use loosely and interchangeably. But do you know that the two terms represent two completely different meanings and concepts? There has been quite some confusion around these two terms, so let me explain and help you better understand.

In the simplest terms a Token is a unit of value given by an organization. In the context of cryptocurrency, the caveat is that this must be accepted by a community and supported on the blockchain.

It’s important to define the difference between a cryptocurrency and a token. While a cryptocurrency operates independently and uses its own platform, a token is a cryptocurrency built on top of an existing blockchain.

What is a Coin?

So, let’s first dive into coins. We can consider Coins to be digital money. Similar to gold, coins supply has a limit, they are widely exchangeable, and they are divisible. There are over 900 different examples of coins, but out of these I am sure that most of you have heard of Bitcoin, that’s one of the first digital coins to bring up other cryptocurrencies like Ether, Litecoin, Ripple, etc. Each of these coins operate on their own blockchain. 

To make it clearer, Bitcoin operates and functions on the Bitcoin blockchain, Ether operates and functions on the Ethereum blockchain. Pretty easy to understand right? All transactions are made public and transparent to everyone in the blockchain system. Now, the purpose of most of these coins are quite simple, it’s use is for a few functions, to transfer money, store value, and act as a unit of account. 

Girl holding Token

What is a Token?

Now that we have a better understanding for coins, let’s revisit tokens. Many people assume tokens and coins are one in the same, but that’s not correct. There’s a pretty big difference between the two! Unlike coins, we create tokens on existing blockchains. 

The introduction of tokens was first on the Ethereum platform. The tokens that are built on this platform are known as ERC-20 tokens. Ethereum allows users to create their own tokens that are able to accomplish specific tasks for the creator. There are also other examples like NEO that uses tokens known as NEP- tokens. All the above platforms allow users to make their own custom tokens. Most of these tokens are used to interact with decentralized applications that are built on top of the different blockchains. 

Cryptocurrencies vs Tokens

It’s important to define the difference between a cryptocurrency and a token. While a cryptocurrency operates independently and uses its own platform, a token is a cryptocurrency built on top of an existing blockchain.

When a company raises funds in an initial coin offering or ICO, it does this by issuing tokens which it distributes to investors with interest in contributing with crypto funds. Most ICOs issue tokens built on Ethereum’s ERC20 platform. 

Types of Tokens

There are two primary types of tokens that we can issue. Security Tokens and Utility Tokens. Security Tokens are most similar to traditional shares of a company, because their value derives from a tradeable external asset. 

On the other hand, Utility Tokens don’t have the same design as traditional investments. Instead, they give the holders access to a company’s future product or service. Because of this, Utility Tokens could be exempt from regulation with the aim at securities depending on the tokens design. 

In addition, there are quite a few different types of tokens, like equity tokens and payment tokens. All these different types of tokens have their own specific function in relation to their name. The biggest advantage of a token is that it does not require any prior skills with programming or mathematics. Many platforms like the Ethereum platform supports creators to create their own token. This allows them to benefit as it saves time while also allows them to have their own token. 

How are Tokens Used?

How do we use Tokens? For security tokens, their most common use is as a fundraising vehicle for Initial Coin Offerings. 

As the industry matures though, we can expect to see more use of tokens as a form of payment, accounting, rewards for participation in a network, ensuring network protection, installing a gateway to extra services, providing a better user experience, and digital asset ownership such as real estate, products, or company shares.

We have already seen the tokenization of commodities such as gold and real estate. And as tokens integrate with the existing global banking system and begin operating under more government regulation, they will gain the public’s trust. ICOs could even one day replace the IPO system if mass adoption and we can establish public trust. 

Coin & Token Transactions

Tokens for Pizza

As for transferring money, you can use them to receive and give value, similar to your normal fiat currencies. As for the store value, it can be something that you hold onto and later swap for something useful. This can be thought of as stocks, generating value in exchange for money. 

Additionally, it serves as a unit of account and its use is for pricing goods and services. Quite useful right? But, it is also important to note that different coins have different features. Some coins like Ether have other functions other than the previous. For example, Ether’s use is also as a fuel for transactions on the Ethereum network. That’s something special to Ethereum’s own platform. 

Example: BAT

To better understand this, let me give you an example. The Basic Attention Token like in our article “BAT”. BAT is a token that pays users for watching ads. By using the Brave web browser, for every ad that you watch, you will get paid in BAT. Users are also able to use BAT to support their favorite content creators. The BAT token is a type of digital token, but there are also other tokens that can represent physical things. Like ArtPro is a platform that utilizes the ArtPro token to allow users to purchase art works online. This is an example of how tokens are useful to exchange for physical assets. 

That was not too hard to understand right? Now that you know the difference between the two, leave a comment down below for your favorite coin and token! 

2 Responses

  1. Your article is so informative. The way you have explained these concepts is easy to understand. Recently I have read about the functionalities and use cases of these tokens in a blog posted by a token development company. Here is the link https://www.securitytokenizer.io/. If you are a blockchain enthusiast like me, then I m sure that this blog will be an intriguing experience for you.

  2. Yes, we are all well-kown about token is a virtual digital asset which is built by the top of the blockchain platforms like Ethereum, Tron, BSC and more. N numbers of blockchain powered tokens are available in the crypto space as well as it creates huge audience in the market. Thanks for the post which is helpful for newbie whom new to the token era

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