What Is Cryptocurrency Token?
What Is Cryptocurrency Token?
The world stepped into the era of digital money long before the first cryptocurrency was introduced. We can purchase thousands of goods on Amazon and other online services using PayPal or WebMoney. However, these are still centralized payment systems that suffer from a lack of security and transparency.
A new peer-to-peer payment system and a decentralized currency Bitcoin (BTC) were launched eleven years ago, enabling secure and anonymous online transactions. Since then, the crypto market has been developing promptly while introducing new concepts of digital assets like a cryptocurrency token. But what is the meaning of a token? How many kinds of tokens are there? And finally, what is the difference between a token and a coin? Cryptocurrency tokens will be explained.
Token in Crypto
In its core, a token is an encrypted string of numbers and letters. Depending on the context, a token in crypto may have different meanings. A token may either define a cryptocurrency in general (BTC, ETH, EOS, etc.) or refer to a digital asset that is built upon a particular blockchain (ONT, USDT, BAT and so on). Meanwhile, the crypto community is used to the latter definition of tokens which will be explored with more details below.
Generally speaking, a token is a digital asset that carries a specific unit of value.
Types of Tokens
The Initial Coin Offering (ICO) boom in 2017, introduced new definitions of cryptocurrency tokens. When investing in a certain crypto startup, an investor hopes that the value of tokens will soon rise and recoup the initial expenses. A security token denominates a project’s share purchased by an investor. Note also, that security tokens are usually under close regulatory scrutiny.
The recent scandal around TON blockchain and its GRAM token is a result of tight surveillance of the United States Securities Exchange Commission (SEC). It claims GRAM to be a security.
As of today, there are several projects that aimed to help blockchain startups to issue security tokens. Polymath introduced an ERC-1400 token standard built off an ST20 (security token standard). Swarm is an open infrastructure for digital securities that offers full lifecycle management of a Security Token Offering (STO).
Utility tokens enable access to startup products and services.
According to bitcoinwiki, Utility tokens are such kind of tokens that allow their owner to buy different services and service items. Utility tokens are used for financing of projects of common infrastructure that couldn’t receive such financing previously.
Most of the decentralized applications (dApps) are built on top of the Ethereum blockchain.
Consequently, most of the utility tokens of dApps are Ethereum-based tokens that also refer to an ERC-20 token standard. DApps tokens make an application work properly.
Example of utility tokens:
FTX (FTT) token is a utility token of the cryptocurrency derivatives exchange FTX. The token is running on top of the Ethereum network and provides users with access to the exchange’s core services.
Security TokensUtility TokensAre considered to be an investmentAre not considered to be an investmentAre under regulator scrutinyFree from security regulationsProvide investors with a project’s shareProvide access to a project’s features and services
Standards of Tokens
Tokens can be fungible and non-fungible. For example, a $1 banknote is a fungible asset as you can exchange it for ten dimes and still have the same amount of value. Whereas non-fungible tokens are unique and one of a kind. At some point, the sculpture ‘David’ created by Michelangelo is a non-fungible asset.
ERC-20 standard presents a fungible and interchangeable type of token that is based on the Ethereum blockchain.
ERC-721 standard or non-fungible tokens. A perfect example of such tokens is CryptoKitties. Each CryptoKitty is an ERC-721 that cannot be destroyed or deleted.
There also a ERC-223, ERC-777, and so on
Token vs Coin
Some may say that there is no difference between a coin and a token as they are both encrypted assets. That is quite correct. However, the difference between these two types of cryptocurrencies does exist.
A coin has its own blockchain and aimed at maintaining a healthy environment within this distributed ledger. It is used as a payment
BTC is a native coin of the Bitcoin blockchain, Ether (ETH) is a native coin for the Ethereum blockchain, and so on.
A token is usually built on top of a certain blockchain and intended to maintain a project’s ecosystem. It is issued by a project to be a unit of value, access services, and so on.
OmiseGO (OMG) is an Ethereum-based token within a financial platform OmiseGO. The token is designed to facilitate payments within the OmiseGO Network.
Token Use Cases
Tokens are applied to:
- Get access to a project’s services (wallets, exchanges, dApps, etc.)
- Create and support an environment of a certain project
- Be a unit of value
- Be a method of payment (DEXs, dApps, etc.)
- Be an investment
- Be a reward