Since the launch of Bitcoin in 2009, the world of cryptocurrencies has continually evolved which has led to the introduction of tokens. Therefore, there is more buzz around cryptocurrency now, more than ever. Similarly, crypto tokens have gained popularity because of their diverse applications among crypto users and investors.
Before deciding where to invest, understanding the common terms is essential. It is easy to use crypto coins such as Bitcoin and Ethereum interchangeably with crypto tokens, but they are not the same. Similarly, while crypto tokens and crypto coins are both based on blockchain technology using an encryption technique known as cryptography, they serve distinct purposes.
Crypto tokens are built on existing blockchain technology that provides it with validation and security. Tokens are assets or access rights granted to their holder. Some of the common examples of tokens are Uniswap, Tether, and Polygon. Thanks to the smart contract, a token holder can gain access rights to programmable assets without a third party through the use of private keys. The role of a token is not limited and can vary from a means of payment to voting right in a network.
A Smart contract, also known as “crypto contract”, is a set of codes containing automated or self-executing agreements among participants. Smart contracts are a form of “white paper” that explains the function of the token and its features and are automatically executed once the conditions of the agreement are met. They are decentralized and distributed across blockchains network. Smart contracts are decentralized because they are not controlled by any government authority, they are immutable as they run on a public database, and they are processed by the blockchain. As a result, crypto tokens transactions are transparent, irreversible, and easy to trace with smart contracts. Put simply, smart contracts are a set of rules agreed upon between the buyer and a seller written in codes.
Crypto tokens are often confused with crypto coins but while both are digital assets, they are varied considerably. Crypto coins have their independent platforms known as blockchain technology and can be converted to other cryptocurrencies. On the other hand, crypt tokens rely on an already built blockchain infrastructure for their validity and security. For instance, Ethereum, Waves, Omni are some of the platforms where crypto tokens are built. That is to say, crypto tokens are dependent upon platforms created by crypto coins. Furthermore, crypto coins are similar to the digital version of fiat currency and are used to foster exchange. While a particular crypto token is built with a specific purpose in mind, a token can serve multiple functions. Additionally, tokens can be represented by assets and securities and not just money.
Now that we have differentiated crypto coins from tokens, would you like to invest in coins or tokens?
Crypto tokens are developed for specific purposes. For instance, a token can be used as a means of payment just like a cryptocurrency while another token can serve as a form of investment. The process of converting assets into a token that can be stored and recorded in a blockchain is known as tokenization. Hence, tokens are given out through Initial Coin Offering (ICO) or Security Token Offering (STO). Tokenization is best understood by knowing the different forms in which tokens exist, some of which are;
As the most common form of token, the value of utility tokens is determined by their usage and functions. Utility tokens are launched through ICO and are issued to users to benefit from the developers’ service. Succinctly put, utility tokens are not for holders to make profits but as a means of exchange for a service. As such, most utility tokens are not created as a way of investment, but as a way of contributing to a network. A real-life equivalent of a utility token is a bus ticket or a fiat currency paid for service. For instance, filecoin is a utility token developed for users to pay for more cloud storage space. A typical example of utility a token is the Basic Attention Token (BAT) which pays publishers and users of digital advertising platforms through the use of Brave Browser. Utility Tokens are usually built on such blockchain technology as ECR-20.
Security Token is becoming one of the fastest-growing tokens globally. According to a report published by Quinlan and Associates, security tokens will grow to $162.7tn by 2030. Unlike utility tokens, security tokens are means of investment. Creators of security tokens launch Security Token Offerings (STO), an equivalent of ICO, to allow users to get access to investors and investment community alike. Different investors can come together to gain access to assets that are usually too big for one investor. A security tokens gives ownership and voting rights to its holders. Therefore, unlike utility tokens which are means of payment, security tokens are similar to the stock of a company which makes the holder one of the owners of that entity. To make profits from security tokens, you buy and hold until their value increases and then sell or exchange them for other assets. Essentially, security tokens are used by startups to raise money from investors, and holders of such tokens can use them as collateral for a loan. Furthermore, security tokens are also known as equity tokens as they pay dividends and fractionalize assets. Blockchain Capital’s BCAP and Sia Funds are two well-known examples of security tokens.
Paying and receiving money via such platforms as Paypal and Payoneer attract certain fees which can be enormous when accumulated to a certain degree. Even fiat money transfer through the traditional banking system tends to include charges. Transaction tokens were created to alleviate the hassle of money transfers. That is, transaction tokens are used to transfer money, pay for purchases and they come with low fees. A typical example of a transaction token is the MEP token created on top of the ERC-20 blockchain for the payment of medical expenses and to carry out other transactions on the Medipedia platform. Another example of transaction tokens is xDai on the Ethereum network created for low cost, fast and stable transactions
Decentralized Applications or Distributed applications, popularly known as dApps are supported by platform tokens. Platforms tokens are diverse and wide and can serve many purposes. It is established that tokens are built on a blockchain infrastructure already existing gaining from the infrastructure’s security and validation. Consequently, the most versatile platform token is ECR-20 which hosts many decentralized applications that vary from gaming apps to applications for making purchases.
The year 2020 witnessed a surge in the use of non-fungible tokens. With Jack Dorsey selling his first tweet for an NFT worth $2.9 million in the first quarter of 2021, the publicity around NFT has increased significantly. This has, in no doubt, boosted the volume of NFTs trading. Now, what are non-fungible tokens? First, non-fungible means non-replaceable. Therefore, you cannot exchange one non-fungible token for the other as each item is specifically created uniquely. Non-fungible tokens use blockchain to keep track of the ownership and exchange of digital assets. Digital assets include memes, songs, videos, animated Gifs, and items in video games. It can be very rare like art or considerably common assets. Nevertheless, the value of non-fungible tokens is determined by the rarity and the uniqueness of the digital asset. That is, the more unique the item, the higher its value. On the flip side, non-fungible tokens cannot be duplicated or changed as they exist on a blockchain, hence, they can be used as proof of ownership.