What are crypto tokens? | Difference between a coin and a token

Learn what crypto tokens are and the difference between them and coins. Explore their uses, types, and how they operate within blockchain networks.

As you learn about cryptocurrencies, you will notice various terms come up such as cryptos, tokens, coins, and more. Typically, he will see people use the terms token and currency loosely and interchangeably. However, the terms have completely different concepts and meanings.

Coins are the main medium of exchange for blockchain networks. crypto tokens, on the other hand, are additional assets created on existing blockchain networks and are not vital to the functioning of the networks. While each blockchain only has one main cryptocurrency, it can have many different crypto tokens.

When people talk about “cryptocurrencies,” they usually mean both assets together. In this guide, we will talk about crypto tokens and how to use the term correctly. Let's dive in.

<h2 class="wp-block-heading" id="what-are-crypto-tokens”>What are crypto tokens?

crypto tokens, explained, are programmable digital assets built on an existing blockchain using smart contracts.

These tokens typically serve various purposes, including providing their holders with access to certain services and functions within a blockchain ecosystem or as digital representations of physical objects.

They can also give their holders voting rights in crypto projects, and those who own more tokens have more say in deciding how things work on a blockchain platform.

crypto token holders can also use them to invest in decentralized finance (defi) protocols, as stores of value, or to make purchases within decentralized applications (dapps). They are often created, distributed, sold, and circulated through crowdfunding rounds such as initial coin offerings (ICOs).

Difference between a coin and a token

Having understood what crypto tokens are, we will now differentiate them from coins, a term that people often use interchangeably with tokens.

Coins are digital assets that operate on their own independent blockchain. They are native to their blockchains and are primarily used as a medium of exchange on the blockchain, much like we use fiat currency in traditional transactions. They can also act as a store of value or have chain-specific use cases.

On the other hand, tokens are digital assets created and operated on an existing blockchain network. They do not have their own native blockchain but require another platform to operate.

Tokens have a different price and different utility than the native cryptocurrency of the blockchain on which they are based. Furthermore, while tokens can be used as a means of payment, their primary purpose is usually to provide access to the functionalities of a decentralized application.

Simply put, the main difference between a cryptocurrency and a token is how and why they are made. The currencies operate on their own blockchain and function primarily as a medium of exchange. However, tokens are built on top of existing blockchain networks and provide a broader range of functionality.

In terms of creation, tokens are easier to create than coins. Creating a currency requires building a new blockchain, which requires time and experience. However, tokens can be created on an existing blockchain using smart contracts, making the process simpler and more accessible.

<h2 class="wp-block-heading" id="how-do-crypto-tokens-work”>How do crypto tokens work?

While cryptocurrencies are generated and distributed through the consensus mechanism of a blockchain network, cryptographic tokens come to life through smart contracts that run automatically on blockchains like ethereum (eth).

These smart contracts contain the rules and behavior of crypto tokens, such as how many will exist, how they will be created, and what they can do.

Developers can create custom tokens by writing smart contract code that adheres to a specific token standard, such as ERC-20, ERC-721, or ERC-1155 for ethereum-based tokens.

These ethereum.org/en/developers/docs/standards/tokens/” target=”_blank” rel=””>symbolic standards play a crucial role. They establish regulations that dictate the essential data that a token must possess, its functionalities and the actions allowed for token holders or communities. They also provide instructions for generating, distributing, deploying, transferring, deleting, and various other aspects of tokens within the underlying blockchain.

ERC-20 tokens are the most common type of token on ethereum and are used for fungible or exchangeable assets.

The ERC-721 standard is primarily used for unique and non-fungible assets, such as collectibles, gaming items, or digital art. Each ERC-721 token has a different value and cannot be directly exchanged for another.

For its part, ERC-1155 tokens combine features of the ERC-20 and ERC-721 standards. They can support fungible and non-fungible tokens within a single contract.

When you own tokens, your address is associated with a balance of those tokens on the blockchain and you can transfer those tokens to other addresses by invoking the appropriate smart contract function.

Investors can use crypto tokens for different purposes. They can hold them to show a stake in the blockchain project or for economic purposes: to trade or purchase goods and services.

As assets with value, crypto tokens can generally be moved, exchanged, bought and sold, and are held in digital wallets, which are software programs or physical devices used to store cryptocurrencies.

Transactions with a cryptographic token occur on the blockchain to which it is linked. For example, if it is an ERC-20 token created on ethereum, then ethereum handles all transactions for that token.

There are several use cases for crypto tokens, including utility, security, governance, and non-fungible tokens (nft). We'll look at each of these features more closely later in the article.

You can trade most tokens on cryptocurrency exchanges and your transactions are validated by network nodes to ensure security and consensus.

<h2 class="wp-block-heading" id="types-of-crypto-tokens”>Types of crypto tokens

As stated above, there are several types of tokens on the blockchain: transactional tokens, governance tokens, utility tokens, security tokens, and non-fungible tokens.

However, a single crypto token can be classified into several categories based on its features and use cases. These are the main types:

Transactional tokens

As the name suggests, these tokens are used for transactions within the ecosystem of a particular project. They often function like traditional currencies, but sometimes provide additional benefits such as increased liquidity and investment opportunities.

An example of a transactional token is bitcoin (btc), which was initially created as a cheap and efficient way to transfer money.

Governance tokens

These types of tokens allow their holders to vote on the decisions of a blockchain project. They are a type of cryptocurrency that is used to vote on proposals, make decisions and influence the future of a project. Each governance token held by a person is typically equivalent to one vote on a proposal.

Utility tabs

These tokens are issued by blockchain projects to cultivate their ecosystems. They are designed to give users access to a product or service, usually available on a dapp. Utility tokens are unique to their ecosystem and allow users to perform specific actions on the network.

Additionally, utility tokens are typically pre-mined, created all at once, and distributed in a manner chosen by the project team.

In most cases, project creators distribute these tokens to raise capital for further development. Holders can then use these tokens to pay fees and services related to the project.

Security sheets

These tokens are digital representations of property rights or asset value that have been transferred to a blockchain token. They are created through a process called “tokenization.”

As an investment asset, a security token transfers value from a real-world asset or set of assets to the holder of the token.

In tokenization, a project inputs what the token represents and then generates the token. The project would then offer this token on an exchange or other suitable investment platform for investors.

Ownership of that token would be recorded on the blockchain and tagged with the owner's blockchain address.

Security tokens can represent ownership of a fraction of any valuable asset, such as a car, real estate, or corporate stock.

Non-fungible tokens

nfts are unique tokens encrypted on a blockchain so that they are impossible to replicate or replace. People can use them to certify the ownership and authenticity of a physical item or a digital file, including music, artwork, or a video recording.

Tokens are created through a process called minting, in which the asset information is encrypted and recorded on a blockchain.

We primarily use this type of crypto token to create digital art, which is bought and sold through online marketplaces like OpenSea and Rarible, depending on the value the market and owners have assigned to them.

However, these tokens do not necessarily convey legal rights to the item they are associated with, as their ownership has no inherent legal meaning in most jurisdictions.

While some nfts grant intellectual property to their holders nft-intellectual-property-considerations#:~:text=nft%20sellers%20offer%20NFTs%20to,in%20the%20underlying%20NFT%20content.” target=”_blank” rel=””>rights, usually represent proof of ownership of an item. As such, they cannot prevent anyone from sharing or copying their associated digital file, nor can they prevent others from creating new nfts based on the same files.

Conclusion

Understanding the dynamics of crypto tokens is essential to effectively navigate the world of cryptocurrencies. From utility tokens that facilitate access to services to security tokens that represent property rights, each type serves a different purpose in the blockchain ecosystem.

Cryptographic tokens can serve as digital expressions of ownership of an asset or enable transactions within a blockchain. However, its similarity to cryptocurrencies often causes confusion, given its tradable and exchangeable nature.

Whether you are an investor, developer, or enthusiast, understanding the nuances of tokens opens up a world of possibilities in decentralized finance and digital ownership.

These tokens frequently serve as a means to raise funds for projects through initial ICOs. However, for those contemplating tokens as an investment, thorough research into the team or issuing company is essential to making informed decisions.