If you’ve been reading about cryptocurrencies and blockchain lately, you may have come across people talking about ‘crypto tokens’. What exactly are these tokens and how do they differ from cryptocurrencies like Bitcoin? Read on to find out.
Before we dive into the differences between tokens and coins, you may need a quick refresher on what cryptocurrencies are. They are digital currencies that people can exchange with goods and services, similar to regular currencies like dollars and euros. If you want to learn more about cryptocurrencies, you can read our cryptocurrency explainer .
Unlike traditional money, cryptocurrencies are not managed by government institutions. All transactions involving particular cryptocurrencies are recorded in a block chain centralized , a ledger that facilitates movements between safe addresses. Coins and tokens are digital assets that are used to transact on the blockchain.
Coins versus tokens
While the words “coin” and “token” are often used interchangeably, they are different types of assets. The most significant difference between a coin and a token is where they operate. Coins are native units of the blockchain on which they are built. For example, Ethereum is native to the Ethereum blockchain, while Bitcoin was created for the Bitcoin blockchain. These currencies use “keys” to indicate ownership of a certain amount of cryptocurrency.
Coins are frequently used in everyday transactions, such as online shopping or sending someone cash. If someone sends you bitcoins, the blockchain facilitates an entry to increase your wallet and reduce the balance of the other person, completing the transaction.
On the other hand, tokens are not native to the blockchain they operate on. For example, many of the most widely used crypto tokens today are run and traded on the Ethereum blockchain. Examples include Tether, which is intended to reflect the value of the US dollar, and Uniswap, a protocol used to exchange different cryptocurrencies.
How do crypto tokens work?
Cryptocurrencies are comparable to the money you have in a bank account. While he owns that amount, the money is not tied to any particular dollar bill or currency. It is when you withdraw from your account that you get a tangible representation of that value. On the other hand, tokens are “owned” and each is an individual asset that you own. For example, gambling chips in arcades represent a claim to play a game.
If you send someone a token, they “leave” your account and move to someone else’s account. This is why tokens can also signify ownership or facilitate exchanges in ownership, as with “non-fungible” tokens. With the NFT , each token is like a “deed” that represents your right to a particular work of art or digital artifact.
Unlike coins, which use a system of public and private keys to facilitate transactions, exchanges made with tokens use a system called » smart contracts «. These blockchain applications can be programmed to make exchanges or transfers when certain conditions are met. Each blockchain that serves as a platform for tokens has a technical standard for defining a smart contract. For example, Ethereum uses one called ERC-20.
Where can you get it?
A common way to obtain crypto tokens is through exchanges of cryptocurrencies . These are large-scale platforms that facilitate trading in a wide range of different currencies and tokens. These will allow you to trade between different cryptocurrencies and regular currencies, manage multiple wallets, verify the value of each crypto, and facilitate the process of sending and receiving currency.
Some tokens are issued through other applications. For example, some newer mobile apps award crypto tokens to people who are actively using their service. These often facilitate transactions between users and make purchases within the application.
Sometimes tokens represent something else for what you paid. An example of this is a “security token”. These are assets that signify your ownership by a company. A security token essentially replaces stocks or stock certificates, an official document that shows what part of a corporation someone owns.
What is a “non-fungible” token?
Some of the most popular types of tokens are « tokens non-expendable »or NFT . They are “non-fungible” because they are not interchangeable with each other. Each token represents ownership of a particular asset, such as art, digital property, or rights to a specific physical item.
During its peak of popularity, a lot of strange things were sold like NFT. For example, in March 2021, Twitter founder Jack Dorsey, sold his first tweet as NFT in a digital auction. Others have sold JPEG image files, game items, and paintings.