No Stupid Questions: What’s a Crypto Token, Anyway?

by
No Stupid Questions: What’s a Crypto Token, Anyway?

As you learn about cryptocurrencies, you’ll notice that various terms such as cryptos, tokens, coins, and much more often come up. Usually, you’ll notice that the terms token and coin are used loosely and interchangeably. However, the terms have completely different concepts and meanings. In this guide, we’ll talk about crypto tokens and what they mean to correctly use the term as it should. Let’s dive in:

What Is a Coin?

First, we will talk about coins. Essentially, we can consider its digital money. They are similar to gold in terms of their supply and exchangeability. Similar to gold, they have a limit, are widely exchangeable, and are also divisible. There are over 900 coins, but one of the most popular is Bitcoin, one of the first digital coins to introduce other cryptocurrencies such as Bitcoin Cash, Ethereum, and Litecoin. Each of these coins operates on its blockchain.

To clarify, Bitcoin performs on the Bitcoin blockchain, whereas Ether operates and functions on the Ethereum blockchain. Isn’t it quite simple to grasp? All transactions in the blockchain system are made public and accessible to everyone. Now, most of these coins have a rather straightforward role; folks may use them to transmit money, hold value, and serve as a unit of account.

What Is a Token?

After learning more about coins, we can now talk about tokens. Although many people mistakenly believe they are the same, they have significant differences. For instance, while coins are usually created on a blockchain, tokens are created on existing blockchains.

There are further instances, such as NEO, which uses NEP tokens. Users can create unique tokens using any of the systems mentioned above. Most of these tokens are employed in decentralized apps constructed on top of various blockchains.

Cryptos Vs. Tokens

A token differs from a cryptocurrency because it’s built on top of an already existing blockchain. While a cryptocurrency can operate independently, a token cannot.

An initial coin offering or ICO is a type of fundraising process that allows a company to raise funds by issuing a token to its investors. These are typically distributed to those interested in participating in the project. Most of the time, these tokens are built on Ethereum’s ERC20.

Types of Tokens

Folks can issue two types of tokens: utility tokens and security tokens. Security Tokens are essentially like traditional company shares, except that their value is derived from an external asset.

Unlike traditional investments, utility tokens do not have the same design as traditional security. Instead, they allow the holders to access a company’s future services and products. Governments could exempt this type of token from regulation if the design is similar to that of securities.

There are various types of tokens commonly used in the market. These include payment tokens and equity tokens. One of the biggest advantages of a token is that it doesn’t require any prior knowledge of math or programming. It allows people to benefit from the ecosystem while reducing the time it takes to create their tokens. One of the most popular platforms that allow creators to create their tokens is the Ethereum platform.

How Are Crypto Tokens Used?

Security tokens are commonly used for fundraising purposes. Folks can use them for various transactions, such as initial coin offerings.

As the industry matures, more transactions will be carried out using tokens, such as payments, rewards, and accounting. Folks can also use them to establish a secure gateway for additional services, improve the user experience, and manage real estate and other digital assets.

Various commodities have already been tokenized, such as gold and real estate. As more regulations are introduced, and the global banking system becomes more regulated, more people will trust cryptocurrencies. Initial coin offerings (ICOs) could eventually replace the traditional Initial Public Offering (IPO) system if the public’s adoption rate is high.

Crypto Token Transactions

You can transfer money and give and receive value, similar to how you would with your fiat currency. On the other hand, store value is something you can keep and use later on for something useful. These are also referred to as stocks, which are essentially exchangeable assets.

One of the main functions of a currency is to provide a unit of account, which allows users to charge for goods and services. However, there are also different types of coins that have different features. For instance, Ether can be used as fuel for transactions within the Ethereum network. That is very special to the platform itself.

What’s a “Non-Fungible” Token?

Non-fungible Tokens (NFTs) differ from other types of cryptocurrencies because they can’t be traded as standard fiat money. Instead, they have their perceived value, so we can’t compare them to bitcoin or US dollar bills. The main difference between NFTs and other types of cryptocurrencies is that they each have a unique item that can be valued.

An easy way to think of NFTs is as if you were trying to trade the Mona Lisa for a rare item such as a Pokemon card. The two items have unique features and traits, making trading them impossible.

So, What Differentiates a Crypto, Altcoin, and a Crypto Token?

The terms cryptocurrencies, altcoins, and crypto tokens are often used to describe different types of digital assets. Here is how they differ:

  • A cryptocurrency is a form of decentralized digital currency. It stores transaction data on a blockchain and uses cryptography to validate transactions. 
  • Any cryptocurrency other than Bitcoin is referred to as an altcoin. They are alternatives to Bitcoin, the first cryptocurrency, thus the name. 
  • A crypto token is a cryptocurrency that does not have its native blockchain. Developers create it on another cryptocurrency’s blockchain.

Essentially, altcoins and crypto tokens fall under cryptocurrencies. In addition, since altcoins are all cryptos apart from Bitcoin, all crypto tokens fall under altcoins.

What is a cryptocurrency?

A Cryptocurrency is a digital currency that uses cryptography for security. As opposed to conventional currencies such as USD or EUR, cryptocurrencies don’t require banks or government institutions to process transactions. Instead, they use peer-to-peer networks to record each transaction. The main advantage of using cryptocurrencies is that money sent between two parties cannot be reversed.

What is a crypto ICO?

An ICO is a way for new cryptocurrencies to be issued and traded like stocks. Before an ICO begins, a company creates a whitepaper explaining how they will use blockchain technology to create something valuable. Whitepapers are usually written in English, Russian, Chinese, or Korean. Investors then purchase tokens during the ICO at a predetermined price, which is typically lower than what the token is worth once the project has launched successfully. The idea is that the person who invests first gets the best deal when the asset goes up later.

Where can I buy cryptocurrency?

There are many crypto exchanges where you can buy Bitcoin, Ethereum, Litecoin, Ripple, Dash etc. If you want to purchase cryptos from USA, go to Coinbase or Gemini Exchange. Most countries accept them too such as Australia, UK, France, Japan, Canada and Singapore.