Crypto Tokens: Getting Started with Tokens | SOMA.finance
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.
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the author and the comments, opinions and analyses are rendered as of the publication date and may change without notice. There is no guarantee that any forecasts or predictions made will come to pass. The information provided in this material is not intended as a complete analysis of all material facts or circumstances regarding any country, region or market. All investments involve risks, including possible loss of principal.
Risk management does not imply elimination of risks, and not all investments are suitable for all investors.The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by SOMA.finance to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Data from third party sources has not independently verified, validated or audited. SOMA.finance accepts no liability whatsoever for any loss arising from use of this information; reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Any products, services and information in this material may not be available in all jurisdictions and are offered local laws and regulation permit. Please consult your own financial professional or legal advisor for further information on availability of products and services in your jurisdiction. Please also see the disclaimer which is found at the bottom of this website under the heading “Important Disclosures”.