If you have been reading about cryptocurrencies and blockchains lately, you may have met people talking about “crypto tokens”. What exactly are these tokens and how are they different from cryptocurrencies like Bitcoin? Read on to find out.
Basics of cryptocurrencies
Before we get into the differences between tokens and currencies, you may need a quick refresher on what cryptocurrencies are. If you want to know more about cryptocurrencies, you can read our explanation about cryptocurrencies.
All transactions involving particular cryptocurrencies are recorded on a centralized blockchain, a ledger that facilitates movement between secure addresses. Coins and tokens are digital assets that are used to transact on the blockchain.
Coins versus tokens
Although the words “currency” and “token” are often used interchangeably, they are different types of assets. The most significant difference between a coin and a token is where they trade. For example, Ethereum is native to the Ethereum blockchain, while Bitcoin was created for the Bitcoin blockchain. These coins use “keys” to indicate ownership of a certain number of cryptocurrencies.
Coins are often used in everyday transactions, such as shopping online or sending someone cash. If someone sends you bitcoins, the blockchain provides an entry to increase your wallet and reduce the other person’s balance, completing the transaction.
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On the other hand, tokens are not native to the blockchain they operate on. For example, many of the most widely used crypto tokens today run and trade on the Ethereum blockchain. Examples include Tether, which is meant to reflect the value of the US dollar, and Uniswap, a protocol used to exchange various cryptocurrencies.
How do crypto tokens work?
Cryptocurrencies are comparable to the money you have in a bank account. Although you own that amount, the money is not tied to any particular bill or coin. It is when you withdraw from your account that you get a tangible representation of that value. On the other hand, the tokens are “property” and each one is an individual asset owned by you. For example, gaming tokens in arcades represent a lure to play a game.
If you send a token to someone, you “leave” your account and go to someone else’s account. This is why tokens can also signify ownership or facilitate property exchanges, for example with “non-fungible” tokens.
erc20 token development With NFTs, each token is like a “deed” that represents your claim to a particular piece of art or digital artifact.
Unlike currencies, which use a system of public and private keys to facilitate transactions, exchanges made with tokens use a system called “smart contracts”. These blockchain applications can be programmed to perform operations or transfers when certain conditions are met. Every blockchain that serves as a platform for tokens has a technical standard to define a smart contract.
Where can you find them? Where can you find them?
A common way to obtain crypto tokens is through cryptocurrency exchanges. These are large-scale platforms that facilitate trading across a wide range of different coins and tokens. These will allow you to trade between different cryptocurrencies and regular currencies, manage multiple wallets, check the value of each cryptocurrency, and ease the process of sending and receiving currency.
Some tokens are issued through other applications. Sometimes the tokens represent something else you paid for. An example of this is a “security token”. These are assets that indicate your ownership of a part of a company. A security token essentially replaces shares or stock certificates, an official document that shows how much of a company someone owns.
What is a “non-fungible” token?
Each token represents ownership of a particular asset, such as art, digital property, or rights to a specific physical item. During its peak of popularity, many rare things like NFTs were sold. For example, in March 2021, Twitter founder Jack Dorsey sold his first tweet as an NFT in a digital auction.
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