- A token is a unit of value that can be exchanged between people.
- The fundamental difference between a token and a cryptocurrency is that the token is built on an existing blockchain, for example, Bitcoin is a cryptocurrency while Shiba Inu (SHIB) is a crypto token.
- There are three types of crypto tokens: Security Token, Utility Token and Equity Token; and they can be used for different functions such as governance or reward tokens.
When a person is taking their first steps in the cryptocurrency ecosystem, it can be particularly overwhelming the number of terms that are used among the community to communicate.
Obviously, if the basic terms are not understood, it is most likely that we miscommunicate or misinterpret information from the crypto ecosystem.
For example, some terms may appear to be synonyms. In fact, It is often believed that cryptocurrencies are the same as tokens and this is fundamentally wrong. That is why, next, this guide will explain what crypto tokens are, what differentiates them and what types exist.
What is a token?
The concept of ‘Token’ is one of the most relevant in the cryptocurrency literature. In particular, this term explains a lot about cryptocurrencies, but also contains its possibilities.
A Token is an object similar to a coin, with the difference that they do not have legal tender and that, in reality,crypto tokens are designed to do exactly the same job as fiat currencies like the american penny. That is, they are units of value that can be exchanged between people.
Now, unlike fiat currencies, tokens are usually born out of a private need. But, Although they are very similar to cryptocurrencies like Bitcoin, they are not exactly the same.
Origin of the Tokens
The introduction of crypto tokens first took place on the Ethereum blockchain. Let us remember that Bitcoin was the first cryptocurrency to be created and, after it, others such as Ethereum followed.
In particular, the Ethereum blockchain allows the creation of ERC-20 tokens, where basically the developers use the foundations of Ethereum to create their own tokens that can satisfy certain needs of the creator.
However, before Ethereum, they were already known as pseudo-currencies that were used as a replacement for fiat money. They were objects that had a certain value in a certain ecosystem; for example, casino chips are tokens.
The problem is that this type of old token was characterized by being easily falsifiable and, of course, centralized. This is where blockchain technology comes to the rescue.
In this way, a token based on blockchain technology inherits some characteristics of cryptocurrency, in this case Ethereum. Specifically, the ERC-20 tokens inherit the traceability and security features of Ethereum. Thus, a peculiarity of crypto tokens is that they are based on the blockchain of a third party.
Differences between cryptocurrencies and crypto tokens
Confusing cryptocurrencies with crypto tokens or thinking that they are exactly the same thing is a fundamental mistake. That is why, below, we tell you what their main differences are:
- A token is a unit of value than the organizations or projects that are developed in the existing blockchain networks. While a cryptocurrency is a native blockchain asset that can be traded, used as a medium of exchange, or as a store of value.
- A cryptocurrency operates independently and is native to its own blockchain, while, a token is built on top of an existing blockchain and thus inherits some of the features of the native cryptocurrency.
- Tokens, unlike cryptocurrencies, are not embedded in the blockchain software itself. The tokens are actually shared through the implementation of Smarts Contracts.
- When a company wants to raise capital through a Initial Coin Offering (ICO)it usually does so through the creation of tokens in blockchains that allow its development, for example, Ethereum.
- BTC is a cryptocurrency because it has its own blockchain which is Bitcoin. The same goes for Ethereum and ETH, on the contrary Shiba Inu (SHIB) is an ERC-20 token.
- Tokens often share great compatibility with cryptocurrencies on their own network, but are still a completely different class of digital assets.
- Crypto tokens, just like cryptocurrencies, can have value and can be traded. However, crypto tokens can additionally be designed to represent physical or digital assets or can be assigned a certain utility.
Types of Crypto Tokens
Within the crypto tokens, there are three subtypes of tokens depending on their properties and uses:
- security token: They are digital assets that represent property rights transferred in a blockchain. Essentially, Security tokens serve a similar function to traditional securities such as stocks, thus they are the type of token that requires the most regulatory scrutiny.
- utility token: As its name indicates, they are a type of asset that provides a product or service to the user who owns it, that is, a utility token gives the user who owns it the right to execute a certain action in a particular ecosystem and in a certain network.
- Equity Tokens: They are closely related to Security Tokens. In fact, it can be considered as a subtype of these. This type of token represents the ownership of some asset or a third-party company; that is, it is a version of an action but on the blockchain. This token represents the share of a company and therefore includes all the rights as any traditional share.
In this way, these are the three most common types of crypto tokens according to their properties. If you want to learn how to differentiate Utility Tokens from Equity Tokens in greater depth, we invite you to read the guide specially designed for it by Bitcoin Mexico.
How do the tokens work?
So if they are not cryptocurrencies, what are tokens for? How are they used by users?
Despite not being cryptocurrencies, crypto tokens are also valuable assets. Therefore, they can be used to transfer, exchange, buy, sell or store value in a crypto wallet.
But, in addition, crypto tokens can serve a wide variety of purposes such as:
- Decentralized Finance (DeFi): This is a large ecosystem in which decentralized financial products are offered. Much of the DeFi ecosystem is hosted on the Ethereum blockchain and ERC-20 crypto tokens are used to obtain loans, serve as collateral or offer loans.
- Rewards: A wide variety of crypto tokens are awarded to users in the form of rewards as incentives for performing certain actions on the network. Tgovernment okays: As government decentralization becomes more relevant, the use of crypto tokens as voting rights on certain projects or companies has expanded. In this way, those who own the token will have a certain right to decide on the future of the project.
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