If you are trying to get your head around the meaning of a crypto token as a blockchain newbie, it is easy to get lost during your first few attempts to make sense of the many similarities between tokens and crypto coins. Also, considering that there are more than 450.000 ERC-20 tokens on the Ethereum blockchain, you might think that creating a crypto token should not be that big of a deal, right?
Then the question is: what are the purposes of all these crypto tokens? How exactly do they work, and what should you look for in a token? All the more, what does token even mean to begin with? Well, worry not! Today we are going to tell you all about the ABCs of crypto tokens with real-life examples – so, let’s jump into it.
Definition of Token
A crypto token is a type of cryptocurrency that uses another cryptocurrency’s blockchain to represent something like an asset, value, or utility in an ecosystem native to the token.
Crypto tokens can be designed to have a number of different purposes, such as a medium of exchange in a particular ecosystem, providing access to an exclusive service on a platform, representing ownership of a digital or physical asset, and so on.
What are Tokens?
Before we get into what crypto tokens are, let’s touch upon the basics of the meaning of a token by taking a look at what it can represent in real life. If getting healthier was one of the milestones in your new year’s resolutions list this year, there is a good chance that you probably own a gym membership card. And when you think about it, as your gym card is there to give you access to your gym, you don’t have to go through a ridiculous process of carrying around your membership agreement with you to make use of your gym’s services. In this sense, your gym card is a token of your gym membership.
Now, let’s get back to the tokens in the world of web3 and their role in the decentralized economy. Created through a process known as Initial Coin Offering (ICO) or Initial Token Offering (ITO), crypto tokens are built on top of existing blockchain technology, such as Ethereum or Binance Smart Chain.
Crypto tokens allow holders to support or be a part of various projects and services without the need for intermediaries or central authorities, such as having ownership of real-world assets like real estate shares that are distributed among other individuals.
The design of tokens allows them to have a wide range of functions, from incentivizing participation in a network, representing rare in-game items, providing a right to contribute to decision-making processes in a decentralized organization, and standing as a means of exchanging value in DeFi apps.
Crypto tokens can be traded with other cryptocurrencies or fiat currencies, staked in returns for rewards, and burned to reduce the total supply, which then makes them more scarce and valuable.
Why are Tokens Important?
Tokens play a vital role in the world of cryptocurrencies as they provide an easy way to represent and transfer value within a particular ecosystem and facilitate the growth and adoption of decentralized networks and applications. Furthermore, tokens provide a means for project developers or individuals to raise funds without the need for traditional intermediaries.
How Do Crypto Tokens Work?
Crypto tokens are created with different token standards that define the rules and conditions for their transfer and management on a blockchain network. These standards specify the token’s basic features, including its fungibility, interoperability, and unique metadata. By adhering to these standards, tokens can be seamlessly integrated into the blockchain network and made available for use by various applications and services.
Among the most widely used token standards are ERC-20 and ERC-721, to define the functionality of tokens on the Ethereum blockchain. ERC-20 tokens are fungible and can be interchanged with other tokens with the same type or value, while ERC-721 is used to create non-fungible tokens (NFTs).
An alternative token standard to ERC-20 and ERC-721 is ERC-1155, which supports both fungible and non-fungible tokens and is used for creating gaming items and other complex assets.
For example, Snapmuse.io’s native utility token SMX is an ERC-20 token available on the Polygon network, and it is designed to function as a means to enhance and innovate the dynamics in the Creator Economy by building bridges between creators and fans through web3 technologies.
Coin vs. Token
Even though the terms crypto coin and crypto token are often used in place of one another, the essential differences between their functionality and their relation to blockchain networks are key factors that set these two terms apart.
To start with, crypto coins are native to their own blockchain, and they are built to be used as a store of monetary value or a medium of exchange. On the other hand, tokens use the infrastructure of an existing crypto coin’s blockchain to represent a digital or physical asset rather than a monetary value.
Furthermore, crypto coins do not move when they are transacted to another user’s account, meaning that the transfer occurs via account balance changes. However, tokens move from one place to another when they are transferred. An example is the transfer of the change of ownership when an NFT is bought or sold on an NFT platform.
Another difference between crypto coins and crypto tokens lies in their cost. Because the creation of crypto coins necessitates the development of a blockchain that is native to that coin, the process of creating coins is more expensive and complicated compared to tokens. We also need to add that tokens can become tokens after a while if they are built to function like crypto coins, but the other way around is not possible.
For example, the BNB token was an ERC-20 token built on the Ethereum blockchain when it was launched back in 2017. Due to the popularity of the project, Binance built its own blockchain (Binance Chain), and BNB token holders could then swap their ERC-20 tokens with BNB coins.