What are Crypto Tokens? | The heterogeneous madman

As you learn about cryptocurrencies, you will notice that there are different terms used to talk about cryptocurrencies. They are sometimes called tokens. Other times they are called coins or occasionally altcoins.

It may seem like some of these terms are interchangeable, but in reality they all refer to different things types of cryptocurrency. In this guide we will explain what cryptographic tokens are and what distinguishes them.

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What are Crypto Tokens?

What are Crypto Tokens?

Crypto tokens are digital assets built on the blockchain of another cryptocurrency.

A blockchain it is a digital register that stores information in linked blocks. This information can be records of transactions or full-fledged programs operating on the blockchain, which are called smart contracts. For example, when transactions of a cryptocurrency are confirmed, they would be grouped into a block and that block would then be added to the blockchain.

Every cryptocurrency is built on a blockchain. If a cryptocurrency does not have its own blockchain and instead uses another cryptocurrency’s blockchain, then it is considered a token.

Blockchain

Blockchain technology is a large-scale ledger of transactions, strengthened by strong cryptography and advanced security protocols.

Crypto tokens and crypto coins

Crypto tokens and crypto coins

A cryptocurrency can be a coin or a token, depending on whether or not it is the native cryptocurrency of its blockchain. Crypto coins have their own underlying blockchains; crypto tokens do not.

To make it clearer, let’s use Ethereum (ET 2.12%) as an example. Ethereum is a blockchain and the native cryptocurrency of this blockchain is called Ether. Since Ether has its own blockchain, it is considered a cryptographic currency.

One of the things that made Ethereum special is that it was the first programmable blockchain. Since it is programmable, developers can use it to launch their own cryptocurrencies. These cryptocurrencies operate on the Ethereum blockchain rather than their own, making them crypto tokens (the official term for tokens built on Ethereum is ERC-20 tokens).

Previous cryptocurrencies, such as Bitcoin (Bitcoin 0.87%), did not have this capability. Ethereum did this, helping it become the second largest cryptocurrency by market capitalization.

Since it is much easier to create a token than a coin, there are many more scams and lackluster projects launched using tokens. However, this does not mean that all tokens are bad investments or that all coins are good investments. There are many tokens with interesting use cases. Of course, there are also crypto coins that have no special use cases or competitive advantages.

Why are crypto tokens important?

Why are crypto tokens important?

Tokens allow developers to create a cryptocurrency without the need to build a blockchain for that cryptocurrency. This is a big deal because it makes the cryptocurrency development process much faster, easier, and less expensive.

For developers looking to create their own crypto currency, blockchain development is a serious technical undertaking. A blockchain must be able to process transactions quickly at low cost and must be resistant to attacks so that hackers cannot steal cryptocurrencies.

Even building the blockchain is not the end of the process. A new crypto coin also needs validators to confirm its transactions. Because cryptocurrencies are decentralized, they rely on people choosing to become validators and lending computing power to the blockchain.

For example, Bitcoin is based on Bitcoin mining, but this requires people all over the world to use mining devices. Developers of a new coin must also think about how to attract enough validators to keep the blockchain secure and avoid fraudulent transactions.

The quickest option is to create a crypto token. Instead of building a blockchain from scratch, developers can essentially build on top of an existing blockchain, such as Ethereum. Their crypto token can then run on the existing Ethereum platform, which already has a secure system to validate transactions and execute smart contracts.

How do crypto tokens work?

How do crypto tokens work?

Like cryptocurrencies, crypto tokens are assets with value. They can typically be transferred, traded, bought and sold and are stored in blockchain wallets. A blockchain wallet is a program or hardware device used to store cryptocurrency.

Transactions with a crypto token are processed on the blockchain it uses. For example, if it is an ERC-20 token built on Ethereum, the Ethereum blockchain will handle all transactions for that token.

In addition to their role as currency, crypto tokens can serve many other purposes. Here are some of the most common uses of cryptographic tokens:

• Governance Tokens: A governance token is a cryptographic token that gives the holder the right to vote in a cryptocurrency project. Token holders can submit and vote on proposals that help determine the future of that specific cryptocurrency. The more tokens you have, the greater your voting power.
• Decentralized finance: Decentralized Finance (DeFi) refers to alternative financial systems based on blockchain technology. For example, instead of getting a loan from a lender, you could provide crypto tokens as collateral and get one from a DeFi platform. Each DeFi platform has its own token that it uses as its official currency.
• Crypto Rewards: The previously mentioned DeFi platforms rely on investors lending their funds in cryptocurrency. In return, investors receive crypto rewards as an incentive. These rewards are usually paid as cryptographic tokens.
• Non-fungible tokens: A non-fungible token (NFT) is a cryptographic token that denotes ownership of a digital asset. Ownership information is stored in the cryptocurrency token. NFTs can be used to show who owns a unique digital image, GIF, or character in an online game.

Cryptocurrency, altcoins and crypto tokens

Cryptocurrency, altcoins and crypto tokens

Cryptocurrency, altcoins, and crypto tokens are common terms you will see used to describe cryptocurrencies. Here’s a quick breakdown of their definitions:

• A cryptocurrency it is a decentralized digital currency. It uses cryptography to verify transactions, and transaction data is stored on a blockchain.
• A altcoins is any cryptocurrency other than Bitcoin. The term derives from the fact that they are alternatives to Bitcoin, the first cryptocurrency.
• A crypto token is a cryptocurrency that does not have its own native blockchain. Developers build it on the blockchain of another cryptocurrency.

There is quite a bit of overlap between these categories. Cryptocurrency includes all cryptocurrencies on the market, which means that both altcoins and crypto tokens fall into this category. And since altcoins include every cryptocurrency outside of Bitcoin, crypto tokens all fall into the altcoin category as well.

Best Crypto Tokens

Best Crypto Tokens

Now that we’ve explained what crypto tokens are, let’s look at some of the best:

• Bind (USDT 0.01%) e Currency in USD (USDC -0.01%) are stablecoins pegged to the US dollar. They are designed to maintain a price of $1 and are both based on the Ethereum blockchain.
• Shiba Inu (SHIB 0.32%) is a controversial figure token meme which saw its price skyrocket in 2021. That success was mainly due to its popularity and the token’s value has dropped significantly since then. It is also built on the Ethereum blockchain.
• Chain shirt (CONNECTION 2.85%) is an oracle network that allows smart contracts on a blockchain to receive real-world data. It is also built on the Ethereum blockchain.
• Uniswap (UNI 3.88%) is the mark for the decentralized crypto exchange of the same name. The Uniswap exchange offers cryptocurrency trading without any central government authority and, like the others on this list, is built on the Ethereum blockchain.

These are some of the largest crypto tokens by market cap, but there are thousands more out there. While some could potentially be a good cryptocurrency investment, the vast majority are not. Since it is so easy to create a cryptocurrency token, many developers launch useless tokens in hopes of making a quick buck.

If you are interested in investing in cryptocurrency, it is helpful to understand crypto tokens. You will come across quite a few of them and knowing what they are will help you better evaluate them as potential investments.

Lyle Daly has positions in Bitcoin, Chainlink, Ethereum, Tether and USD Coin. The Motley Fool has positions and recommends Bitcoin, Chainlink, Ethereum and Uniswap Protocol Token. The Motley Fool has a disclosure policy.

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