What is a Token?
In the world of cryptocurrencies, there are now over 2000 different digital currencies in circulation. To most investors, digital currencies appear as nothing more than code, like BTC for Bitcoin or ETH for Ethereum. However, many of them cannot quite grasp the difference between the two terms "token" and "coin". In this article, we'll explain what a token is by comparing it with "coin" and also introduce the type of tokens based on their functionalities.
In order for you to have a better understanding of the subject, at TruBit Academy we would like to mention what a token is, which are the most known types and the differences between a token and a traditional currency.
An easy definition... What is Token?
A token is a unit of value that uses cryptography and is created by a private organization within a blockchain, such as those found in systems like Bitcoin or Ethereum. Although bitcoins are an example of 'tokens', they are not limited to just being cryptocurrencies, but can perform a variety of additional functions.
In a private network, a token can have multiple functions, such as granting certain rights, remuneration for services rendered or for the provision of information. It can also act as a stimulus, serve as a key to access additional services or enhance the user experience.
The function of a token is determined by the person or entity that creates and develops it. Tokens can contain different levels of value, with the designer defining the specific content of each token.
Difference between Coin and Token
Crypto coin is the native currency of its own blockchain. For example, the Bitcoin blockchain's coin is BTC, while the Ethereum blockchain has ETH, and the Litecoin blockchain uses LTC. Similar to traditional currencies, the primary purpose of these crypto coins is to store value and serve as a medium of exchange, which is why they are referred to as currencies.
Another unique aspect of these coins is how they are created. Since crypto coins are bound to a particular blockchain, creating one requires a lot of work to develop a blockchain network before producing coins. Typically, crypto coins are either mined using a Proof of Work (PoW) consensus mechanism or earned through a Proof of Stake (PoS) mechanism.
Speaking of crypto token, it represents a specific tradable asset or utility on the blockchain. However, they are not native to the blockchain and can only be built on top of other blockchains in the form of Layer-2 or Layer-3, meaning they must be based on another virtual currency to play a role. For example, ETH is the native token of the Ethereum blockchain, and any other crypto assets on the Ethereum blockchain are considered tokens.
While crypto tokens can be bought and traded like coins, they are not primarily used as a medium of exchange but are more like asset or even covenants of specified projects. They can represent DAOs, digital products or NFTs, and also serve as a means of payment within their ecosystems. Additionally, tokens grant their holders the right to participate in the network, execute functions with digital assets, or represent ownership in a company.
Types of Token
Utility tokens are used within a network to provide services, such as pay network fees or redeem rewards. Though we can trade utility tokens as investment assets on exchanges, their primary purpose is to support the operation of the blockchain network.
Governance tokens generally represent the right to participate in the decision-making of decentralized protocols, such as voting to support protocol changes or having a voice in decisions within decentralized autonomous organizations (DAOs). Governance tokens ensure the decentralized nature of cryptocurrency projects, as all decisions are made by community, not by a central authority.
A security token is a form of cryptocurrency that represents fractions of assets that have real value such as equity, a company or real estate. As an investment asset, security tokens are digital assets that represent ownership or other rights to transfer value from an asset to a token.
Despite the name, stablecoin is a type of cryptocurrency designed to track the price of fiat currency in the real world, eg. USDT, MMXN and nARS. It represents mostly the payment attributes of currency, hence it is called Stablecoin. The purpose of Stablecoin is to make it a low-volatility cryptocurrency, similar to the types of currency people use in their daily lives. As stablecoins are meant to maintain the value, it's generally used for savings, for making transfers, or for earning interest via certain savings agreements.
NFT, or Non-Fungible Token, is a special category of crypto token with a unique blockchain address. Each NFT is one-of-a-kind and can not be replicated, which is why NFTs can be considered as digital "property", similar to limited edition trading cards or unique pieces of artwork. NFTs represent a form of digital media, often likened to "virtual collectibles."
Coins, as fundamental cryptocurrencies, have the potential to generate substantial platform value due to network effects and economies of scale as they grow and develop. Tokens, on the other hand, are suited for specific vertical industries and contribute to the diversity of the blockchain ecosystem.