As you learn about digital currencies, you become familiar with different terms to talk about them. For example, what are cryptocurrency tokens?
In the cryptographic world, different words are used to refer to the same term, although each one has unique characteristics.
Crypto tokens are digital assets that are based on the blockchain of another cryptocurrency, i.e. If a cryptocurrency does not have its own blockchain and instead uses the blockchain of another, then it is considered a token.
What differentiates a token from a cryptocurrency?
The main difference, as we have already mentioned between tokens and cryptocurrencies, is that the former require another blockchain platform (not their own) to function. Ethereum is the most common platform for creating tokens, mainly due to its smart contract function. Tokens originating from the Ethereum blockchain are generally referred to as ERC-20 tokens, such as Tether.
Why do you create tokens?
To begin with, the purpose of tokens is also different from that of cryptocurrencies, although they can also be used as a means of payment. It is defined according to their utility:
1. Utility tokens
This token provides certain access to a product or service run or operated by the issuer of the token. A person can gain access by purchasing the token and redeeming it for a defined access value to the product or service. They are created for use within decentralized applications (DApps) and their networks.
2. Security token
Security tokens are linked to financial securities and function in a similar way to the buying and selling of stock trades. Those who buy this type of token invest in a project with the expectation that its price will increase and bring current or future profits.
3. Equity token
A type of security token, it functions more like a traditional equity asset. In other words, those who hold equity tokens have some form of ownership in their investments. Each token represents a percentage of the ownership they actually have.
4. governance token
Governance tokens are tokens that developers create to allow token holders to help shape the future of a protocol. Holders of governance tokens can influence project-related decisions, such as proposing or deciding to
5. Asset token
It is a token that allows backing real-world assets such as commodities, goods, real estate, works of art, among others, in order to make the purchase and sale without the need to move.
Cryptocurrency token platforms
These are some of the platforms where they are usually created and used.
1. Ethereum
The Ethereum blockchain has the largest number of tokens running with approximately 250 thousand. The reason is that this blockchain was created for this purpose. This can be clearly evidenced in the creation of standards such as the ERC-20 token, which greatly facilitates the task of creating and deploying a cryptographic token.
2. Bitcoin
It was the first blockchain that revolutionized this technology, it is also one of the most used to create tokens.
Why are tokens important?
Tokens allow developers to create a cryptocurrency without the need to create a blockchain for that cryptocurrency. Which makes the cryptocurrency development process much faster, simpler and less expensive.
How do cryptocurrency tokens work?
As cryptocurrencies, crypto tokens are valuable assets. They can usually be transferred, exchanged, bought and sold, and are stored in blockchain wallets.
Transactions with a cryptographic token are processed on the blockchain it uses. For example, if it is an Ethereum-based ERC-20 token, the Ethereum blockchain will handle all transactions for that token.
To conclude:
- A cryptocurrency: is a decentralized digital currency. It uses cryptography to verify transactions and transaction data is stored in a blockchain.
- A cryptocurrency token: It is a cryptocurrency that does not have its own native blockchain. Developers build it on the blockchain of another cryptocurrency.
