Blockchain technology and cryptocurrencies continue to reshape the traditional world of finance right before our eyes. One of the main driving forces behind this evolution is tokens, which are essential to every crypto project.
In this comprehensive guide, we will explore what tokens are and how they differ from other digital assets, as well as discover the types of tokens available today and how they can be used in various aspects of life.
Introduction to tokens
Definition of tokens
To start, let’s answer the question: what is a token? In its essence, a crypto token is a way of representing an asset or value on the blockchain. This could be a virtual currency, shares or other securities, artworks, real estate, or other various types of assets.
Tokens can be traded, bought, and sold much like coins. They are also used to access certain applications or platforms, and their value often depends on their utility.
How tokens work
Another important aspect for the token definition is that tokens are created on top of an existing blockchain network, such as Ethereum, Solana, TON, or others you may have heard of.
Tokens operate with the help of smart contracts. These are special programmes that autonomously and automatically execute predefined conditions. When a new token is created, its parameters (such as the total supply and usage rules) are set within the smart contract that manages this asset.
Nowadays, smart contracts have become quite accessible, meaning that anyone can create their own token. All it takes is choosing a blockchain and writing the necessary code for the smart contract.
Tokens vs. coins
But if both tokens and coins are essentially cryptocurrency, is there a difference between them? Can these terms be used interchangeably? Well, there is definitely a distinction, and the terms token and coin will never be synonymous.
There are two main differences between these two classes of digital currency:
Blockchain. Crypto coins have their own blockchain, where they are used as the native currency for transactions. Examples include BTC, ETH, and LTC. Meanwhile, as we’ve mentioned earlier, tokens are built on existing blockchain ledgers. They are not only used for payments but serve many other purposes too (we will discuss them further).
Nature of the asset. Another key difference between tokens and coins is that tokens can be either centralised or decentralised, depending on the structure of the project. Centralised tokens are controlled by a single entity, while decentralised tokens are governed by a network of distributed nodes. Decentralised tokens are often considered more secure since they don’t have a single point of failure. However, centralised tokens may be more efficient, as they are managed by one entity, allowing to make faster updates, for instance.
If you want to learn even more about the differences between tokens and coins, make sure to check out our guide via this link. The itez team has provided an in-depth explanation of why tokens and coins are not the same thing.
Types of tokens
1. Utility tokens
Utility tokens provide access to specific products or services within a blockchain ecosystem. Such tokens can be used to pay transaction fees or to access certain features on a platform.
One of the most well-known examples is the ETH token, which is used to execute transactions and run smart contracts on the Ethereum network. Other notable examples in this category include BNB (Binance Coin), UNI (Uniswap), and LINK (Chainlink).
Ethereum official website
2. Security tokens
Security tokens represent a share in a real asset or business and are regulated similarly to traditional securities. They are often used to raise capital.
Investors purchasing these tokens effectively gain a right to a portion of the profits generated by a company or asset.
An example of a security token is TZROP — the token of the tZERO platform, one of the leading platforms for the tokenization of securities. By holding this token, investors are entitled to dividends and can participate in corporate decision-making processes.
tZERO official website
3. Equity tokens
Equity tokens, like traditional shares, represent ownership in a company. However, unlike regular shares, they exist on the blockchain and are managed by smart contracts. These tokens give holders certain rights like voting and receiving dividends.
A notable example of an equity token is NEXO that not only provides utility functions on the Nexo platform but also offers its holders a share of the company’s profits. This makes it a hybrid of a utility and equity token.
Nexo official website
4. Non-fungible tokens (NFTs)
NFTs are unique digital assets, such as works of art, music, or collectibles. When purchasing an NFT, the buyer does not acquire the asset itself but rather the right to own it.
Each NFT is unique and cannot be replaced by another, which is why these tokens are widely used in art, gaming, and collectibles.
Examples include collections like CryptoPunks, Bored Ape Yacht Club, or other image-based collections.
BAYC NFT collection. Source: OpenSea
🔥 Interesting! Previously, the itez team explained how to buy NFTs in 2024 and whether it’s worth investing in non-fungible tokens.
5. Governance tokens
Governance tokens grant their holders the right to participate in the management of decentralised platforms. For example, holders of these tokens can make decisions within the network or blockchain platform, vote on protocol changes, and decide on project development and resource allocation.
An example is MakerDAO (MKR), which is used for voting on key decisions and risk management strategies within the Maker protocol.
MakerDAO official website.
How tokens are created
Token standards (ERC-20, ERC-721, etc.)
One of the most important characteristics of any token is its standard. This standard defines what blockchain networks the asset will be compatible with, as well as what smart contracts and applications it can interact with.
The most well-known standards are ERC-20 for fungible tokens and ERC-721 for NFTs. These standards ensure compatibility and simplify the work for developers, making it easier to integrate tokens into various platforms.
Smart contracts and token creation
Token creation occurs through smart contracts — programmes that automatically execute predefined conditions. With the help of a smart contract, developers can set the maximum supply of tokens that will ever be issued (i.e. determine their emission). In addition, smart contracts allow developers to manage how these tokens are distributed among investors.
Token minting process
Token minting is the process of creating new tokens and adding them to the system. This process is governed by a smart contract that defines all the rules and parameters for issuing tokens.
Depending on the type of the token, the minting process can involve various stages, such as pre-sale, mining, or an initial coin offering (ICO).
Uses and applications of tokens
1. Tokens in decentralised finance (DeFi)
Tokens play a pivotal role in the decentralised finance (DeFi) ecosystem. In DeFi, they are used for lending, liquidity provision, and executing transactions without intermediaries. These tokens are often employed as collateral or to generate income through staking.
One such token is ADA, the native token of the Cardano project. Cardano is a flexible and scalable platform for deploying smart contracts, and it hosts numerous decentralised finance apps.
ADA token performance in 1-year timeframe. Source: CMC
2. Tokens in supply chain management
Tokens can assist in tracking goods throughout supply chains, providing transparency and reliable data. They can record information about the origin of a product, its production stages, and delivery.
The logistics industry is attracting a number of blockchain startups that are actively enhancing this sector. One example is the VeChain ecosystem (officially rebranded as VeChain THOR). The project's native token, VET, acts as fuel for the network, ensuring transparency and reliability of transactions.
VET token performance in 1-year timeframe. Source: CMC
3. Tokens in digital identity verification
Blockchain and tokens enable the creation of decentralised digital identity systems. This can improve data security and privacy, giving users full control over their digital identifiers.
4. Tokens in gaming and virtual worlds
The gaming industry is already leveraging tokens to create virtual worlds where players can earn, trade, and sell virtual assets. NFTs have become a popular method for confirming ownership of unique items within games.
Such tokens are widely used in classic NFT games or in new tap-to-earn games, which have gained significant popularity this year, particularly in the Telegram messenger. Examples of such games and tokens include Notcoin (NOT) and Hamster Kombat (HMSTR).
Top gaming tokens. Source: CMC
Investing in tokens
How to buy and store tokens
You can buy different types of tokens, along with other digital assets, on popular cryptocurrency exchanges. For beginners, the best option would be to use centralised exchanges (CEX), as they are much simpler to navigate, and they have customer support teams that can help resolve any issues that may arise.
Popular examples of such exchanges include Binance, Huobi, KuCoin, and OKX. You can also buy tokens instantly on itez. It is the easiest way to purchase coins without hidden fees.
Spot/margin market to buy tokens and coins on Binance. Source: Binance
To store ICP, as with any other cryptocurrency, it's recommended to use secure storage options. It can be hot wallets, perfect for quick and frequent trading, or cold wallets, that are often used for long-term storage of large sums.
Risks and rewards of token investments
Even if a deal looks highly promising and your trading strategy seems flawless, it’s crucial to always bear in mind the risks. Here are some of the most common dangers associated with investing in tokens:
1. High Market Volatility. Due to sudden price fluctuations, you could lose your investment within minutes.
2. Risk of Scams, Fraud, and Hackers. The cryptocurrency market is still rife with bad actors. Some create fake projects to exploit unsuspecting investors and disappear with their money, while others hack wallets and user accounts on exchanges. Taking a careful and informed approach to every action on the market can help mitigate this risk.
Of course, investing in crypto tokens also offers potential rewards. Here are just a few of the benefits associated with purchasing digital assets:
1. The potential to make quick profits. Smart investment choices can yield long-term value, and token price fluctuations may allow investors to make money in the short term.
2. Diversification and protection against inflation. Buying tokens from various projects working in different areas allows investors to diversify their portfolio, thereby reducing overall risk.
‼️ Important: this article is not financial or investment advice. Remember that you are solely responsible for your financial investments. The itez team does not encourage you to invest in the digital assets described in this article or any other digital assets.
Regulatory considerations
Token regulations vary from country to country. Some nations have already implemented clear rules for security tokens and other types of tokens, while others are still developing their legislation. Investors must keep a close eye on legal changes to avoid regulatory risks.
For example, the UAE has attracted many crypto investors and companies from around the world due to its clear and well-defined industry regulations. Meanwhile, the U.S. Securities and Exchange Commission (SEC) struggles to do the same. Due to overly strict and sometimes illogical regulatory rules, crypto businesses are leaving the country for jurisdictions with a more transparent and friendly regulatory landscape.
Frequently Asked Questions (FAQ)
What is a crypto token? A crypto token is a representation of an asset or value on a blockchain. It can be used as virtual currency, securities, or even for accessing services and applications within blockchain ecosystems.
What is the difference between a token and a coin? The key differences are that coins, like BTC or ETH, have their own blockchain, while tokens are built on existing blockchains. Coins are primarily used for transactions, whereas tokens serve a variety of purposes, including access to applications or platforms.
How are tokens used in blockchain? Tokens are used for various purposes, such as payments, lending, staking, or governance within decentralised platforms. They can also represent assets or rights, and are essential in many blockchain applications, including DeFi, supply chains, and gaming.
Conclusion
Tokens are digital assets built on existing blockchains, serving various roles like payments, access to services, and decentralised finance (DeFi). Major types include utility, security, equity, and NFTs, each offering unique functionalities.
As blockchain technology advances, tokens will play a growing role in decentralised applications. With wider adoption in DeFi and gaming, and developments in regulation, tokens have the potential to reshape various industries.
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Here are three other cool articles:
How to create cryptocurrency: a comprehensive guide
Understanding protocols: the backbone of digital communication
How to earn crypto rewards: a comprehensive guide
This article is not investment advice or a recommendation to purchase any specific product or service. The financial transactions mentioned in the article are not a guide to action. It’s not intended to constitute a comprehensive statement of all possible risks. You should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.
