Crypto Token in Blockchain | Cryptocurrency Tokens

The term crypto refers to a special virtual currency token or how cryptocurrencies are denominated. These tokens represent tradable assets or utilities that reside on their own blockchains.

These tokens are usually created, distributed, sold, and circulated through the standard Initial Coin Offering (ICO) process, which involves a crowdfunding exercise to fund project development.

Key Takeaways

• Crypto tokens are a type of cryptocurrency representing an asset or specific use and reside on their own blockchain.
• Tokens are means of investment, value storage or purchases.
• Altcoins and crypto tokens are types of cryptocurrencies with different functions.
• Created through an initial coin offering, crypto tokens are often used to raise funds for crowd sales.

Working of Crypto Tokens

Cryptocurrencies are denominated into these tokens, which reside on their own blockchains. Hence, crypto tokens, which are also called crypto assets, represent a certain unit of value. Now let’s understand how it works.

Cryptocurrencies are systems that allow for secure payments online denominated in virtual tokens. These tokens are represented by ledger entries internal to the system. The crypto assets often act as the transaction units on blockchains (like Ethereum), which allows a user to create tokens.

These blockchains operate on the concept of smart contracts, where the programmable but self-executing code is used to process and manage the transactions that occur on the blockchain.

Imagine, you can have a crypto token that represents a certain number of customer loyalty points on a blockchain, used to manage such details for a retail chain. There can be another crypto token that entitles the holder to 10 hours of free streaming on the blockchain. Another crypto token may even represent other cryptocurrencies, such as a crypto token being equal to 15 bitcoins on a particular blockchain. Such crypto tokens are tradable and transferrable among the various participants of the blockchain.

Crypto coins are forms of currency that can be used to make purchases, but you can use a crypto token for many other reasons as well, including as investments and to store value.

Special Considerations

Tokens are created through an initial coin offering, which is like an Initial Public Offering (IPO) but of cryptocurrencies. Tokens are created by cryptocurrency companies that want to raise money. Investors interested in the company can purchase these tokens.

These tokens can be used to represent a stake in the cryptocurrency or could be traded for goods and services. As a practical example, decentralised storage provider Bluzelle allows investors to stake their native tokens that help secure its network and earn transaction fees and rewards.

Crypto tokens vs crypto coins

A cryptocurrency can be in the form of either a coin or a token, it depends on whether it’s the native cryptocurrency for its own blockchain or not. Crypto coins have their own underlying blockchains while crypto tokens don’t.

For example, Ethereum is a blockchain, its native cryptocurrency is called Ether(ETH). Since Ether has its own blockchain, it is considered a crypto coin. But the Ethereum blockchain is programmable, hence developers can use it to launch their own cryptocurrencies. These new cryptocurrencies operate on Ethereum’s blockchain. But these cryptocurrencies do not have a blockchain of their own, this makes them crypto tokens (or ERC-20 tokens).

How do crypto tokens work?

Since crypto tokens are assets of value they can typically be transferred, traded, bought, and sold, and they’re stored in blockchain wallets. Transactions with a crypto token are processed on the blockchain that it operates on.

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

1. Governance tokens: Governance tokens grant their holders voting rights in a cryptocurrency project. This allows holders to make and vote on proposals that help determine the future of that specific cryptocurrency. The more tokens you hold, the more voting power you have.

2. Decentralised finance: This is a Blockchain-based alternative financial system. For example, You can use crypto tokens as collateral for a DeFi loan instead of a traditional loan from a lender. Each DeFi platform has its own token that it uses as its official currency.

3. Crypto rewards: DeFi platforms rely on investors lending their own cryptocurrency funds. In return, investors receive crypto rewards as an incentive that are paid out as crypto tokens.

4. Non-fungible tokens (NFTs): This is a crypto token that denotes ownership of a digital asset. The ownership information is stored in the cryptocurrency token. NFTs can be used to show who owns a unique digital image, a GIF, or a character in an online game.

5. Security tokens: These are a new class of assets that aim to be the crypto equivalent of traditional securities like stocks and bonds. Their main use is to sell shares in a company without nedding a broker. Major companies and startups have been reported to be investigating security tokens as a potential alternative to other methods of fundraising.

Cryptocurrency Tokens in Encryption

Since every Crypto Token is exclusive and corresponds to special information with something like a non-public key. However, it doesn’t contain that information specifically (so that it can be shared in public while not jeopardising the information). It’s like “a hash of the dealing” (and distinctive code that relates back to a selected transaction while not containing sensitive data regarding it).

This allows individuals to verify possession of Bitcoin on the blockchain without sharing sensitive data.

The result is that the Blockchain contains tokens listed next to public dealing information. A token (of the encrypted type) identifies the dealing and forms by the sender mechanically, and also the remainder of the dealing information record in conjunction with it.

Since the token is identified using a dealing ID, it is used as a dealing variety and term a “TXID” (that is, a dealing ID).

Crypto Tokens vs Cryptocurrencies vs Altcoins

There stands a lot of confusion amidst the general public among the terms altcoins, cryptocurrencies, and crypto tokens. Even though people mistakenly use them interchangeably, these terms differ from each other.

A cryptocurrency is a standard digital currency used for making or receiving payments on a blockchain(like Bitcoin, ether, etc) The cryptocurrency is the superset, while altcoins (and crypto tokens) are two subset categories.

Altcoins are alternative cryptocurrencies that were launched after the massive success achieved by Bitcoin. The term means, basically – other than bitcoins. They were launched as enhanced Bitcoin substitutes that have claimed to overcome some of Bitcoin’s pain points. Lite coin, Bitcoin Cash, etc.

Cryptocurrencies and altcoins are essentially specific virtual currencies with dedicated blockchains and are primarily used as a medium for digital payments. On the other hand, crypto tokens operate on top of a blockchain which is a medium for the creation and execution of dApps and smart contracts, and the tokens are used to facilitate the transactions.

Top crypto tokens

Now that we’ve explained what crypto tokens are, let’s take a look at a few of the top ones:

1. Tether and USD Coin are stablecoins pegged to the U.S. dollar. Their value is tied to that of the dollar and they’re both built on the Ethereum blockchain.

2. Shiba Inu is a controversial meme token that skyrocketed in 2021. That success was primarily due to its popularity as a joke. The token’s value has fallen significantly since then. It’s also built on the Ethereum blockchain.

3. Chainlink is an oracle network that allows smart contracts on a blockchain to receive real-world data. It’s built on the Ethereum blockchain as well.

4. Uniswap is the token for the decentralised crypto exchange with the same name. It offers cryptocurrency trading with no central governing authority, and, like the others on this list, is built on the Ethereum blockchain.

Why are tokens important?

Tokens enable developers to create a cryptocurrency without having to build a blockchain for it. As a result, cryptocurrencies will be developed faster, simpler, and cheaper.

Additionally Crypto coins require validators in order to confirm their transactions. Cryptocurrencies are decentralised, so they rely on users lending their computing power to the blockchain as validators.

Crypto Token FAQs

What is the purpose of tokens?

Crypto tokens can represent an investor’s stake in the company or they can serve an economic purpose like a legal tender. This means token holders can use them to make purchases or they can trade tokens just like other securities to make a profit.

Is Bitcoin a token or a coin?

Bitcoin is a cryptocurrency, which has virtual tokens or coins that can be used to trade or make purchases.

What is the difference between a crypto coin and a crypto token?

Crypto coins allow individuals to make payments using their digital currency. People can use tokens, though, for many more reasons. But, a store of value is an asset, commodity, or currency that maintains its value without depreciating.

What are some of the different types of tokens that reside on blockchains?

Tokens that reside on blockchains include reward tokens, currency tokens, utility tokens, security tokens, and asset tokens.

Bottomline – Crypto Token

In cryptocurrency the term Cryptographic token doesn’t mean one factor, it refers to several things altogether. Basically, a token is “a backup for one thing else.”

A Crypto token is an encrypted string of information that points to knowledge without truly containing the initial data. It also gets created once someone creates a group action. This string identifies the group action and is usually kept on the blockchain. Therefore folks typically decide cryptocurrencies “tokens”.

In this respect, Ether is the native cryptocurrency token to the Ethereum blockchain. Whereas, Bitcoin is the native cryptocurrency token to the Bitcoin blockchain.