If you’ve read about crypto and blockchain recently, you may have come across people who talk about “crypto tokens”. What exactly are these tokens and how are they different from cryptocurrencies like Bitcoin? Keep reading to find out.
Basics of cryptography
Before we get into the differences between tokens and coins, you might need a quick refresher on what cryptocurrencies are. They are digital currencies that people can exchange for goods and services, similar to regular currencies like dollars and euros. If you want to learn more about cryptocurrency, you can read our cryptocurrency explicator.
Unlike traditional currency, cryptocurrencies are not managed by government institutions. All transactions involving particular cryptocurrencies are recorded on a centralized blockchain, a ledger that facilitates movement between secure addresses. Coins and tokens are both digital assets used to transact on the blockchain.
Coins against tokens
Although the words “coin” and “token” are often used interchangeably, they are separate types of assets. The most significant difference between a coin and a token is where they operate. Coins are native units of the blockchain on which they are built. For example, Ethereum is native to the Ethereum blockchain, while Bitcoin was created for the Bitcoin blockchain. These coins use “keys” to signify ownership of a certain amount of cryptocurrency.
Coins are frequently used in everyday transactions, like shopping online or sending money to someone. If someone sends you bitcoin, the blockchain facilitates an entry to increase your wallet and reduce the other person’s balance, thus completing the transaction.
On the other hand, tokens are not native to the blockchain they operate on. For example, many of the most widely used crypto tokens today are executed and traded on the Ethereum blockchain. Examples include Tether, which is meant to reflect the value of the US dollar, and Uniswap, a protocol used to trade different cryptocurrencies.
How do crypto tokens work?
Crypto coins are like money you have in a bank account. As long as you own this amount, the money is not tied to any particular dollar bill or coin. It’s when you withdraw from your account that you get a tangible representation of that value. On the other hand, tokens are “owned” and each is an individual asset that you own. For example, game tokens in arcades each represent a claim to play a game.
If you send a token to someone, it “leaves” your account and moves to another person’s account. This is why tokens can also signify ownership or facilitate the exchange of goods, as with “non-fungible” tokens. With NFTs, each token is like an “deed” that represents your right to a particular work of art or digital artifact.
Unlike coins, which use a system of public and private keys to facilitate transactions, trading with tokens uses a system called “smart contracts”. These blockchain applications can be programmed to perform transactions or transfers when certain conditions are met. Each blockchain that serves as a platform for tokens has a technical standard to define a smart contract. For example, Ethereum uses one called ERC-20.
Where can you get them?
A common way to get crypto tokens is by trading cryptocurrencies. These are large-scale platforms that facilitate transactions on a wide range of different coins and tokens. These will allow you to trade between different cryptocurrencies and regular currencies, manage various wallets, check the value of each crypto, and make the process of sending and receiving currencies easier.
Some tokens are issued through other applications. For example, some newer mobile apps give crypto tokens to people who actively use their service. These often facilitate transactions between users and make in-app purchases.
Sometimes the tokens are something else you paid for. An example of this is a “security token”. These are assets that signify that you own part of a business. A security token essentially replaces stocks or stock certificates, an official document that indicates how much of a company a person owns.
What is a “non-fungible” token?
Some of the more popular types of tokens are “non-fungible tokens” or NFTs. They are “non-fungible” because they are not interchangeable with each other. Each token represents ownership of a particular asset, such as art, digital property, or rights to a specific physical item.
During its peak in popularity, a lot of weird things were sold as NFT. For example, in March 2021, Twitter founder Jack Dorsey sold his first tweet as NFT in a digital auction. Other people have sold JPEG image files, game items, and paintings.