Digital Tokens: Getting Started with Tokens
A short, simple guide to different types of tokens and how they work.
- It has become common to refer to all crypto-assets that are not Bitcoin or Ethereum as tokens, and at a deeper level, tokens are projects that operate on top of base layer protocols.
- Tokens can be transferred, exchanged, or stored in digital wallets, just like cryptocurrencies.
- Non-fungible tokens (NFTs) offer a way to convey ownership rights to a unique digital or real-world asset and have helped to solve the problem of digital items being copied and shared.
- Security tokens are a newer class of crypto assets that are designed to be the digital equivalent of traditional securities like stocks and bonds.
Technically speaking, a token is the same thing as a cryptocurrency or “crypto asset,” but is increasingly used to refer to more specific meanings depending on the context. It has become common to refer to all crypto assets that are not Bitcoin or Ethereum as tokens, and at a deeper level, tokens are projects that operate on top of base layer protocols like Ethereum and Solana.
If you’re still unsure as to what is a crypto token? And what is its difference from cryptocurrency? Here’s a simple explainer: The two most common blockchain-based digital assets are cryptocurrencies and tokens. The biggest differentiation between the two is that cryptocurrencies have their own blockchains, whereas crypto tokens are built on an existing blockchain.
There are a variety of different forms that tokens can come in, such as a currency for an ecosystem or as a one-of-a-kind encoded piece of data, while a new breed of tokens is redeemable for off-chain assets like gold, real estate, or stocks.
The potential applications for tokens are wide-ranging and include the ability to help a decentralized exchange continue to operate or enable a rare, in-game item to be pulled out of the game and sold on a decentralized marketplace.
Most importantly, tokens can be transferred, exchanged, or stored in digital wallets, just like cryptocurrencies. Different characteristics and capabilities separate tokens into two main categories: Utility tokens vs Security tokens.
In general, utility tokens grant access to a service or can function as a medium of exchange within a cryptocurrency ecosystem. Decentralized applications (dApps) rely on utility tokens to do things like automate interest rates or sell virtual real estate, but they can also be traded like any other cryptocurrency and can oftentimes be used as a form of collateral on lending protocols.
Decentralized finance is one of the fastest growing sectors of the cryptocurrency market and includes protocols that aim to bring the main functions of the traditional finance system, such as lending, saving, insurance, and trading, into the crypto token ecosystem. DeFi protocols issue tokens that perform a variety of functions and can also be traded or held like any other cryptocurrency.
These are tokens that give their holders voting rights within a protocol or application so that they can have a say in the project's future. This functions as a sort of decentralized board of governance as decentralized applications don’t have boards of directors or other centralized authority structures.
Non-fungible tokens (NFTs)
NFTs offer a way to convey ownership rights to a unique digital or real-world asset and have helped to solve the problem of being able to just copy and share a digital item. The technology has numerous applications ranging from art, music, gaming, logistics, tracking, real-estate and personal data management.
Security tokens are a newer class of crypto assets that are designed to be the digital equivalent of traditional securities like stocks and bonds.
The main use case for security tokens is the tokenization of things like the shares of companies that currently trade in separate stock markets or other major financial investments like real estate so that they can be traded in a decentralized setting without the need for a broker.
Tokenized assets, such as stocks or bonds, are digital securities (in the form of non-fungible tokens) that are issued on a blockchain and represent a legal proof of ownership for the asset in question.
Learn more about cryptocurrencies from our articles below.
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