Crypto Token

Article byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Crypto Token?

Crypto tokens are digital assets operating on crypto coins’ blockchain. They represent an investor’s stake in an organization and can fulfill economic purposes. In other words, one can use them to purchase goods and services or trade them like financial instruments to make financial gains.

Crypto Token

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These tokens perform the same function as physical tokens, such as the British Pound and American Cent. They are units of value that one person can pass on to another. Such digital assets are of various types, for example, platform, transactional, security, etc. First introduced on the Ethereum blockchain, they play a vital role in making payments faster and easier.

Key Takeaways

  • A crypto token is a digital asset that does not have its blockchain, unlike a crypto coin. However, they are programmable, permissionless, and offer transparency.
  • There are six types of crypto tokens — transactional, governance, utility, security, platform, and non-fungible tokens. Crypto token prices are subject to significant fluctuations because of the dynamic economic environment.
  • Crypto coins have their blockchain, unlike cryptocurrency tokens. Creating the former is more difficult than the latter. Hence, scammers find it difficult to exploit people using crypto coins.
  • Various cryptocurrency tokens like Tether, Chainlink, and Shiba Inu operate on the Ethereum blockchain.

Crypto Token Explained

Crypto token meaning refers to digital assets built for a decentralized project; they operate on an existing blockchain, such as Ethereum. In technical terms, it is a code attached to a user’s public wallet address. Individuals can utilize these tokens to purchase something or buy or sell them, like stocks, bonds, etc., to make a profit. While these tokens can hold value, they can also represent physical assets such as art and real estate, specific services or utilities, and digital assets like artwork.

Cryptocurrency tokens are programmable, meaning that these digital assets run on software protocols comprising smart contracts. Such contracts outline the tokens’ roles and characteristics and the network’s engagement rules.

As the tokens are permissionless, one does not need special credentials to participate in the system. In addition, there is no central authority administering the system. Another crucial feature of crypto tokens is transparency; anyone can view and verify the protocol rules and transactions.  

Tokenized assets enable people to carry out transactions securely and easily without an arbitrator, thus creating a frictionless market. Moreover, they eliminate several barriers to the system. From trading to storing value, these digital assets benefit every sector.

Individuals interested in investing in these digital assets should remember that crypto token prices are subject to high volatility due to the dynamic nature of the market. Hence, they should invest after considering various factors, such as financial goals and risk appetite.

Types

There are different types of crypto tokens, each with distinct characteristics based on usage. That said, a token can be a part of more than one category. Hence, these digital assets are not mutually exclusive. Let us look at them in detail.

#1. Platform Tokens

These tokens support a decentralized application or dApp on a blockchain. The Uniswap protocol is an example of a dApp that uses smart contracts to enable users to swap various Ethereum tokens with other Ethereum tokens. The Uniswap protocol has its token called the UNI token.

Platform tokens benefit from the blockchain where they operate, gaining increased security and the capability to support transactional activity.

#2. Transactional Tokens

They provide a straightforward and fast way of transferring money. In most cases, their function is similar to conventional currencies. Nevertheless, sometimes, they can offer more benefits. Usually, the transaction fee associated with these tokens is lower than financial institutions; it enables individuals to carry out several transactions.  

#3. Utility Tokens

These tokens allow users to access a blockchain-based service or product. One can use them to pay for services within the ecosystem. The Basic Attention Token and Golem are two examples of utility tokens.

Individuals can utilize utility tokens for commercial intent. A synergistic relationship exists between utility tokens and platforms. A platform offers security for a utility token, whereas the token offers the required network activity to bolster the platform’s economy.

#4. Security Tokens

The objective of security tokens is to be the crypto equivalent of conventional financial securities like stocks, bonds, etc. They represent ownership in these traditional financial assets. Its primary use case is offloading shares of a company or other enterprises, such as real estate, without a broker. Multiple companies are trying to determine whether they can use these tokens instead of other fundraising methods.

#5. Governance Tokens

Governance tokens enable the token holders to vote on particular things, for example, the future of an application or protocol. In most cases, the protocols do not have any central authority. Hence, such tokens prove to be extremely useful while making crucial decisions. For example, Compound, a popular savings protocol, issues a token called COMP to every user. It allows them to vote on how to upgrade Compound. The more tokens a user gets, the more votes they get.

#6. Non-Fungible Tokens

Non-Fungible Tokens, or NFTs, have become extremely popular in the crypto world. They represent ownership of one-of-a-kind digital assets; usually, the assets are digital art. However, they can also be tweets, videos, etc. These tokens make it extremely difficult to share and copy digital creations. Therefore, one can consider it a certificate of authenticity for digital creations on the internet.

Examples

Let us look at a few crypto token examples to understand the concept better.

Example #1

There are various crypto tokens in the market right now. Some of them are as follows:

  • Chainlink: This decentralized oracle network allows smart contracts on the blockchain to receive real-world data.
  • Tether: Pegged to the U.S. dollar, Tether aims to make buying and selling cryptocurrencies easier and cheaper.
  • Shiba Inu: A group or individual named Ryoshi created this coin to compete with Dogecoin as a joke. That said, this meme coin has become very popular among investors.

All three tokens operate on the Ethereum blockchain.

Example #2

Martin Shkreli Inu, a crypto token launched by the former hedge fund manager Martin Shkreli dropped over 90% in value at one point on August 12, 2022. This is because a wallet belonging to the MSMB Capital Management and Elea Capital co-founder offloaded a substantial stake in the cryptocurrency.

Per Etherscan, a sequence of blockchain transactions showed that an unidentified crypto wallet received 160 billion tokens from a wallet named 0xshkreli.eth.

A Discord account believed to be run by Martin Shkreli claimed that someone hacked him.

Crypto Token vs Coin

The main difference between a crypto coin and a crypto token is that the former has its blockchain, whereas the latter does not. A blockchain can have only one native asset, i.e., the crypto coin. That said, there can be several cryptocurrency tokens operating on the blockchain.

To help individuals understand better, let us take the example of the Ethereum blockchain. While the native cryptocurrency of the blockchain is Ether, various tokens are operating on the same blockchain. A few examples are USDT, MATIC, and LINK.

The number of scams and lackluster projects associated with crypto tokens is higher than with coins, as creating tokens is easier. Nevertheless, it does not mean that coins are a better investment option. After all, a cryptocurrency token can have a more interesting use case than a coin.

Frequently Asked Questions (FAQs)

1. How to create a crypto token?

Individuals can create a cryptocurrency token by following these steps:
1. Define the token properties.
2. Create a smart contract.
3. Run several tests on a test blockchain.
4. Deploy the smart contract.

2. Where to buy new crypto tokens?

One can buy crypto tokens by following these steps:
1. Select a cryptocurrency exchange or broker.
2. Create an account and complete the verification process.
3. Deposit cash to start investing.
4. Place an order.
5. Select the storage method.
Also, Individuals can purchase new crypto tokens during an Initial Coin Offering or ICO. For that, they can go through these steps:
1. Register for an ICO via the project’s website.
2. Purchase Ether or Bitcoin to participate in the ICO.
3. Transfer Ether or Bitcoin to a Wallet.
4. Purchase ICO tokens.
5. Transfer the crypto to their address
Once the steps are complete, one will receive ICO tokens at their address.

3. How to burn crypto tokens?

Individuals must transfer the tokens into an unlocatable and inactive cryptocurrency wallet. After that, they can’t access them anymore.

This article is a guide to What is Crypto Token and its meaning. Here, we explain the various types of crypto tokens along with examples and compare them with crypto coins. You can also go through our recommended articles on corporate finance –

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