In today’s world, terms like cryptocurrencies, web3, coins, blockchain and NFTs are heard and read on a daily basis. These terms have moved from being relatively unknown terms to everyday words in a short space of time. Some of these terms like “coins” used to mean something entirely different until the rise of cryptocurrencies.
Token is one of those words. Generally, a token is a small representation of a larger item. In essence, a coin made out of gold is a gold token. Since the onset of crypto, token now means way more than just a tiny representation.
What is a crypto token?
When discussing crypto, “token” is often used interchangeably with “coin.” Token usually refers to all cryptocurrencies and digital assets on the blockchain. However, there is some context with which it is used.
The first is mostly for cryptocurrencies that are not Bitcoin and Ethereum (even though they’re all technically tokens. The second context is to describe digital assets that run on an existing blockchain like Shiba Inu (SHIB) and Tether (USDT) which are ERC-20 tokens that run on the Ethereum blockchain.
The biggest differentiation between tokens and crypto coins is that while coins are inbuilt and inseparable from the blockchain, like ETH to Ethereum and LTC to Litecoin, tokens are built and controlled by smart contracts which are embedded in the blockchain.
A smart contract is basically a group of computer code that has been written to automatically execute an action whenever a set of criteria is met.
Types of tokens (based on characteristics)
Based on their characteristics, there are two main types of tokens.
Fungible Tokens
Fungible tokens are digital assets that can be exchanged or traded for another. Fungible tokens are your physical cash and coins, they all have the same value.
Let’s say you have a $1 bill. If you exchanged that bill with another $1 bill from the bank, it’d still be the same value as your previous $1 bill. This means your $1 bill is a fungible token. It can be easily exchanged with another bill and the value stays the same.
All cryptocurrencies are fungible tokens. You can exchange 1 Bitcoin (BTC) from Coinbase with another 1 Bitcoin (BTC) from Binance and it would still be the same. That’s what makes it fungible.
Non-Fungible Tokens (NFTs)
Within the last two years, non-fungible tokens have been able to carve a name for themselves. They have continued to increase in value while cryptocurrencies suffer a drought.
Let’s take the $1 bill scenario again. NFTs are different in the sense that, if you exchange the same piece of NFT art or even a meme, the value and identity of each item would be unique and different.
That’s why they are called Non-Fungible Tokens. They can’t be traded for another. Each NFT is special and cannot be duplicated.
Types of tokens (based on utility)
Tokens are used differently and for a wide range of functions in the blockchain.
Decentralised Finance (DeFi) Tokens
DeFi tokens are created to make regular financial transactions like payments, lending and investing 10 times better. There are a wide variety of DeFi tokens that replicate traditional financial services like insurance, borrowing, saving and trading.
These tokens can be deployed for the purpose they were created or bought and held with the hopes that their value will increase like regular cryptocurrencies.
Security Tokens
Security tokens are basically the crypto version of regular financial securities like stocks, treasury bills, bonds, and mutual funds. They make it easy to buy these regular stocks and other securities by removing the need of a middleman or broker.
For example, buying security tokens of Tesla or Apple is like buying a cheaper representative of the stock. You aren’t really buying the stock but if there’s an increase in the value of Tesla or Apple stock, the value of your security token would also increase, thereby giving you the same value at a cheaper price.
Governance Tokens
As the name implies, governance tokens give you a say in how a particular blockchain, platform, community, or decentralised autonomous organisation (DAO) is run.
Holders of governance tokens can influence the decisions of blockchain communities or platforms. The more governance tokens you own, the more influence you have.
Many blockchain organisations give out governance tokens to their users on a regular basis.
Token is a frequent part of the crypto vocabulary and understanding what it means is important. We believe that a large hurdle to the adoption of cryptocurrencies and the blockchain is the complex terms and jargon which can be quite hard to understand and appreciate.
