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Token is a word that we often hear in digital currency. In fact, you might hear Bitcoin termed as a cryptocurrency token or something similar to that as technically all the digital assets can also be termed as tokens. But the work crypto token has increasingly taken on several meanings that are quite common that there are chances that you will encounter them on a regular basis.
What Is Crypto Token And How Does It Work?
The term crypto token implies a special digital currency token or how cryptos are denominated. Their tokens portray tradeable and fungible assets or utilities that remain on their blockchains. They are often employed to fundraise crowd sales, but along with that they can also cater as a substitute for other commodities. These tokens are generally formulated, distributed, sold, and circulated via the standard ICO (Initial Coin Offering) process, that involves the exercise of crowdfunding to fund project development.
As stated above, digital currencies are denominated into these tokens which stay in their own blockchains. Blockchains are special databases that keep data in blocks that are then linked or chained together. This implies that crypto tokens which are also known as crypto assets portray a certain unit of value.
Now let us have a look at how it operates. Crypto implies various encryptions algorithms and cryptographic techniques that protect these entries like public-private key pairs, elliptical curve encryption, and hashing functions.Digital currencies on the contrary are systems that enable for secure payments online which are designated in virtual tokens. They are then represented by ledger entries that are internal to the system.
These crypto assets often cater as the unit of transaction on the blockchain that are formulated using the standard template such as the Ethereum network that enables a user to formulate a token. Such blockchain operates on the idea of dApps (decentralized applications) or smart contracts, wherein the programmable, self executing code is employed to manage and process the various transactions that take place on the blockchain.
For instance, you can avail a cryptocurrency token that portrays a specific number of customer loyalty points on the blockchain that is used to handle similar details for the retail chain. There can be another virtual crypto token that offers entitlement to the token holder to see a streaming of 10 hours on the blockchain.
Types Of Crypto Tokens
It is crucial to understand varied types of crypto tokens and their importance. The token structure can be primarily classified into 6 types. Without any further delay, let us begin with the types of crypto tokens.
1. Layer 1 Token
Layer 1 tokens are native for a particular blockchain while also employed for powering all the services in the blockchain. One of the notable instances of this type of token in digital currencies in the BNB on the Binance Chain. Ether or ETH on the Ethereum network is also a significant instance of the Layer 1 digital currencies.
2. Layer 2 Tokens
This form of token has a unique implication in the meaning of ‘what is crypto tokens’. They are employed in the case of dApps (decentralized applications) in a specific network. For instance, OMG tokens are categorized as Layer 2 tokens as they are enacted for OmniseGO, which is a decentralized venture in the Ethereum network.
Apart from the ones that have been stated above, token economics also emphasizes dividing the tokens into sectors on the basis of usage. Now let us have a look at some other types of tokens.
3. Security Tokens
The security tokens are termed as investment contracts, and they have to fulfill several conditions for the same. Security tokens must involve a common enterprise, money investment, and profitability with computation efforts from varied contributors. Security tokens include a comprehensive process for contract checking, also known as the Howey Test. Tokens that are able to pass the Howey Test earn the credential of security tokens. One of the notable instances of security tokens is obvious in the way of operating the Siafunds or SF on the Sia network.
4. Utility Tokens
The utility tokens are also another crucial classification of tokens you would see in tokenomics. Utility tokens are primarily useful for financing a network, and they are issued via an Initial Coin Offering (ICO). The ICO is crucial for funding project development. For instance, the Basic Attention Token or BAT portrays a utility token initially delivered via an ICO. Now, BAT could be good for decentralized advertising on the Brave browser, which operates on the Ethereum network.
5. Fungible Tokens
Fungible tokens are normally known for having the same value along with the facility for duplication. The instance of the fungible token is clearly depicted in the case of Ether (ETH) on the Ethereum network. The value of ETH tokens is the same and that could be replaced with each other as they have the similar value.
6. Non-Fungible Tokens
Non-fungible tokens do not share the same value, thereby portraying uniqueness. NFTs have received prominent attention in the latest times while driving interest in tokenomics, primarily with high-profile NFT auctions. Tokenization of assets like collectibles, real estate, pictures, and artworks with NFT has not only urged a new wave of digital ownership revolution but also portrayed the potential of tokens. Without any potential for replication, NFT use cases bring a higher value of non-fungible tokens in comparison to fungible tokens.
Difference Between A Crypto Token And A Crypto Coin
Almost everyone has confused a crypto coin to that of coin, at any point of their cryptocurrency journey. The fact is that tokens and coins are very much similar on the basic level. They both portray value and can possess payment. You can swap tokens for coins and vice versa. The crypto token list is huge and so is that of the coin’s.
The primary difference among these two comes to their utility. There are various things that you can do with tokens but not with coins. On the contrary, there are some marketplaces that will accept coins and not tokens. It is the same as compariting investors and traders, all traders invest but not all investors trade. By this time we have studied crypto tokens in detail. So it is time to learn about crypto coins to understand the difference between crypto token vs coin better.
What Are Crypto Coins?
When Bitcoin was first released, it set the standard for what it implies to be a digital coin. There are evident qualifications that distinguish crypto coins from tokens, which are similar to fiat money. The coin is illustrated by the following characteristics:
Operates on its blockchain
A blockchain keeps measure of all transactions that associate its native crypto coin. When you pay someone with Ether, the receipt goes to the Ethereum blockchain. If the same person pays you back later with BTC, the receipt then goes to the Bitcoin blockchain. Every transaction is protected by encryption and is available by any member of the network.
Acts as money
Bitcoin was formulated for the sole aim of replacing fiat money. The paradoxical appeal of anonymity and transparency inspired the formulation of other coins, that include ETH, NEO, and LTC.
You can buy services and merchandise from many major corporations presently, like Amazon, Tesla and Microsoft, using crypto coins. BTC has lately become an official currency of El Salvador along with the US dollar.
Can Be Mined
You can get crypto coins in two ways. One is via traditional mining on the PoW (Proof of Work) system. Bitcoin hunters employ this process to boost their earnings. The issue with this is that there are not that many BTC left to mine, so the method becomes more arduous each day.
The other method is PoS (Proof of Stake), which is a more modern approach for earning coins. It is lighter on energy consumption and is easier to do. Cardano is one of the largest coins that adopt this system.
The Bottom Line
By now you must have been aware of what a crypto token is and the difference between a crypto coin and a coin. One quick way for you to decide which you should pay attention to depends on what you are purchasing. If it is a product then often you will require coins. If it is a service then you can do it with tokens. There are various new crypto tokens which you can go for. If you are wondering how to buy crypto tokens, there are various crypto exchanges from where you can buy them. Intriguingly, the way we spend tokens is quite the same as cash. When you pay cash, your money physically shifts from your hand to someone else’s. But we did mention that only coins portray money, and they do not move at all.
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