What are Cryptocurrency Tokens?
Cryptocurrency tokens and cryptocurrency coins are similar because they are both a type of digital money. However, while a coin is native to its own blockchain, a TOKEN isn’t. It typically operates on another asset’s blockchain.
The Long Definition
Cryptocurrency is a type of digital money. It is like “regular” money, but it only exists online.
A cryptocurrency token is a crypto asset created on an existing blockchain, whereas coins have their own blockchain. For example, Bitcoin has the Bitcoin blockchain and ether has the Ethereum blockchain. They are crypto coins.
On the other hand, DAI doesn’t have its own blockchain. It is an ERC-20 asset created on the already existing Ethereum blockchain. This makes it a crypto token.
Tokens can be used in many different ways. These include representing physical items like art and collectors’ items on a blockchain. When these things of value are tokenized, they can more easily be traded on a blockchain.
Tokens are also used as a governance mechanism. Here, they allow users to vote on the future development of different blockchains and frameworks.
Tokens do not have their own blockchain and are issued using smart contracts on a blockchain. There are many different types of crypto tokens, but some of the main ones are stablecoins, liquidity provider (LP) tokens, governance tokens, and utility tokens.
Coin vs. Token
Coin and token are two terms that describe different types of crypto assets.
A coin is a digital currency that is native to its blockchain. Native means it’s created as part of the blockchain’s infrastructure by the project building the network. Think of it as the main currency of its blockchain used to pay for data that needs to be verified and other services.
Examples of crypto coins include ether (ETH) on the Ethereum blockchain, Binance coin (BNB) on Binance Smart Chain (BSC), and Bitcoin (BTC) on the Bitcoin blockchain.
Characteristics of a Crypto Coin:
A cryptocurrency coin has several key characteristics. These are:
- It is issued directly by the blockchain on which it runs: For instance, new ETH comes directly from the Ethereum blockchain.
- It is used to pay the network’s transaction fees: Transactions on the Bitcoin blockchain are paid in BTC and those on BSC are paid in BNB.
- It is used to incentivize users to help secure the network: Validators and miners are typically paid in the coin of the blockchain they are working on.
On the other hand, a crypto token is a digital currency that is not necessarily native to its blockchain. It is usually created by a project or application that operates hand-in-hand with an existing protocol. So, a token is defined as a digital asset that runs “on top” of a blockchain.
A good comparison would be how a computer has an operating system such as Microsoft Windows which manages and controls the computer. However, you can then add different programs to the computer that might not be made by Microsoft. So while Windows is the main program/system in place, these other programs can add new functionality and capabilities on top of the operating system.
Generally, a blockchain network has only one main asset, its coin. However, it can have any number of tokens built on top of it. A good example is the Ethereum blockchain.
ETH is the native asset (coin) of the Ethereum blockchain. There are also a couple of hundred other digital currencies on Ethereum. These are the tokens. The most popular ones are Tether (USDT), Shiba Inu (SHIB), Basic Attention Token (BAT), and Wrapped Bitcoin (wBTC).
Is it Better to Have Coins or Tokens?
Coins tend to be more valuable than tokens. They are usually more popular and have a much higher value than the tokens with which they share the same blockchain. But, that hasn’t stopped the creation of crypto tokens. In fact, today, there are thousands more tokens than there are coins.
Why is that?
Building a cryptocurrency coin is a lot of work. It requires the project to create a new blockchain network. This involves writing code, building a consensus mechanism, and attracting enough validators or miners to secure the system. Teams are also tasked with consistently updating the system and patching vulnerabilities.
Crypto tokens are much easier to create. For one, there is no need to build a new blockchain network. All a project (the computer program from the example above) has to do is create an asset that runs on someone else’s blockchain network (the operating system). This asset will be able to use the network’s existing infrastructure to stay secure and stable.
Most projects looking to create a digital currency tend to go for tokens instead of coins.
Types of Cryptocurrency Tokens
Cryptocurrency tokens can be grouped into:
Stablecoins are crypto tokens whose value is pegged to another asset. This other asset typically has a value that is considered stable. It could be the US dollar or precious metals like gold.
Most stablecoins are pegged to the dollar. So, their value should always be equal to one US dollar. Examples include USDT, USDC, BUSD, and DAI.
Utility tokens are tokens that serve a specific purpose (have utility) within a project. For instance, it can be used to access products and services offered by the project.
Governance tokens are minted by decentralized autonomous organizations (DAOs). These organizations have no central authority. Instead, ownership and management rights are distributed among members.
DAO members are issued governance tokens to represent their ownership of the protocol. These tokens allow the holder to participate in the management of the organization.
Liquidity Provider (LP) Tokens
LP tokens are issued by liquidity pools. These are how individuals can “be the bank” in cryptocurrency. People pool their money together and, like a bank, they rent it out. Other people borrow money from the pool, paying interest on it just like money borrowed from a bank.
The interest goes to the people who put their money in the pool. The liquidity providers win because they make more interest than they would in a savings account, and the borrower wins because they pay less interest than they would to a bank.
What’s The Role of Tokens in Crypto?
Tokens are a crucial part of the crypto space. This is because they help fuel real-world applications of blockchain technology.
For instance, stablecoins are an excellent way to pay for goods and services. Governance tokens, on the other hand, are central to the management of real-life blockchain-based organizations.