What is Token? - The Ultimate Guide For Beginners!
Describe Crypto Token. And it’s Attributes.
Numerous people believed that cryptocurrency and crypto tokens were the same thing. And equally employs the two. The two categories of digital assets that are most frequently used on blockchains are cryptocurrencies and tokens. However, they both have separate connotations. Cryptocurrency is a type of digital currency that operates on a native blockchain, whereas crypto tokens operate on an existing cryptocurrency blockchain using smart contracts and are capable of a wide range of functions, including granting access to platform-specific features and services or serving as a representation of a physical object.
What is a Token?
A Crypto token is a digital asset that is built on the existing blockchain using smart contacts. Unlike cryptocurrency, the crypto token represents assets as well as deeds. They share ownership of digital assets like NFT or even physical products. Since tokens are built on existing blockchains it often uses the Ethereum blockchain protocol through smart contracts. For example, a crypto token on Ethereum follows the ERC20 token standard using a smart contract. Smart contracts must follow the rules, conditions, and functions set by the token standard, which dictates crypto tokens, and how work. Among the cryptocurrency tokens created with Ethereum are Crypto Kitties, LINK, DAI, and COMP. On the platforms for which they are designed, these tokens can perform a wide range of tasks, such as playing games, engaging in decentralized finance (DeFi) procedures, and accessing platform-specific services.
Difference Between Cryptocurrency and Crypto Token:
Tokens are often referred to as cryptocurrency besides Bitcoin and Ethereum. Cryptocurrencies are built on native blockchains whereas tokens are built on existing blockchains. For example, Ethereum is a blockchain that has its own cryptocurrency known as ether. Others also utilize Ethereum to create a cryptocurrency as a crypto token. Crypto tokens belong to a whole distinct category of digital assets. They work with cryptocurrencies. Crypto tokens represent assets such as art, and music and are also used for governing mechanisms such as voting and also for decision-making. Tokenization is the process of developing crypto tokens to carry out these diverse purposes.
Features of Crypto Token:
Programmable: Unlike cryptocurrency which needs its own blockchain to create a coin. Crypto tokens are easily programmable in that they can be built on the existing blockchain using smart contracts. The smart contracts outline the functions and rules of a crypto token.
Permissionless: Crypto token requires neither permission nor any credentials to create them. That anyone can create it without any credentials.
Trustless: Though it doesn’t have any central authority to control, tokens run on the rules that are made through smart contracts. Since it doesn’t have its own blockchain, it runs on the rules and functions made through smart contracts.
Transparency: Anyone can verify the regulations that are created for its functions because they are transparent. And also transactions made through tokens are transparent for the purposes of verifying it. But no one can edit or modify it.
Mechanism of Token:
Cryptocurrency tokens are established using an existing blockchain, such as Ethereum, to conduct transactions. Blockchains are a type of database that are used to store transactions or other types of data in blocks that are then connected by chains. Blockchains are employed in crypto tokens together with smart contracts that specify the procedures to be followed. Transactions pertaining to crypto tokens are kept on the blockchain which was used to create them. The blockchain wallet, which is used to hold cryptocurrency, allows for the trading, selling, and buying of the assets contained in the crypto token. Cryptocurrency tokens can also be used as governing tokens, non-fungible tokens, or defi tokens.
Governance token: The token holder has been given a right to vote for the cryptocurrency to determine the specific cryptocurrency. And also token holder doesn’t have any governing authority or board of directors.
Non-fungible token: A non-fungible token, or NFT, is a crypto token that is used to give ownership to digital assets like music, art, and video games. NFTs are used to sell unique digital paintings, music, or accessories for video games. A cryptographic token stores the information of the owner, who buys the digital assets.
Defi: Decentralized finance, or Defi, is a digitalized financial system that is built on blockchain. Defi is used to lend, borrow, or trade globally without the intervention of third parties. Each decentralized financial system has its own cryptocurrency token. Defi uses that crypto token officially for all transactions.
Types of Tokens:
Security token: The security token has the highest regulation compared to other tokens because of the external assets that are being used. The security token is used for properties, bonds, and other trade which needs highly secured regulations to protect users’ investments. Security token also represents the stake, stock as well as voting rights.
Utility token: The utility token is not like regular cryptocurrency, they sever as access to a certain period of time. The utility tokens are like vouchers or coupons which can be used for a certain period but the holder cannot claim ownership over that product. For example, you can buy a ticket to a concert as a crypto token and uses that ticket only until the concert gets over.
Payments token: The payment token is basically used for buying and selling assets through the digital market. They are nothing but paying to the assets without involving the third parties.
Benefits of crypto token:
Smooth trade: The assets which are tokenized can easily be traded without a moderator. The traditional market makes trading a huge task whereas trading using crypto tokens is made very easy.
Earn: Digital finance makes earning money easy. Blockchain paves the way for initial coin offerings (ICO) and decentralized finance (Defi), which facilitate smoother trading. The blockchain-based transactions are protected and recorded for verification purposes. In the conventional method of trading, brokerage fees are paid to the bank in order to borrow or lend money. However, lending or borrowing a crypto token through defi or any other form of blockchain-based digital finance is free of the need for brokers.
Pseudonyms: The data used in the blockchain are protected so that nobody can edit or modify it. Only transaction history is made visible to other users. The name of the holder is shown in pseudonyms.
The crypto token which is built using existing blockchain can be used for the purposes of trading. Crypto tokens are different from cryptocurrency, they both serve the same purposes of trading and storing value. Since crypto tokens are made with smart contracts, they are used for decentralized applications.