What is a Crypto Token?
Crypto tokens are a subset of cryptocurrencies used to provide specific utility on blockchain networks. A token can be issued through fundraising methods like initial coin offerings (ICOs) or initial DEX offerings (IDOs).
Generally, crypto tokens are designed using specific token standards that function as a set of parameters or rules. The most common standards for tokens are ERC-20 and ERC-721, which allow tokens to be compatible with dApps and generate non-fungible tokens (NFTs) on the Ethereum blockchain.
Similar to cryptocurrencies, token can be traded, transferred, and stored in crypto wallets. Besides their value as digital currencies, tokens serve various purposes, including:
- Governance: Governance tokens interact with smart contracts to give the holders the right to introduce and vote on major proposals, such as ecosystem changes or upgrades.
- Staking: Holders can provide liquidity to staking pools and earn staking rewards and transaction fees.
- Access: Utility tokens grant holders access to services and products in the ecosystem.
- NFTs: Tokens can also be used to denote the ownership of a unique digital asset in the form of non-fungible tokens (NFTs).
How are Crypto Tokens Different From Other Cryptocurrencies?
Crypto token, altcoins, and coins/cryptocurrencies all refer to digital assets that can be traded on the market and use cryptography to secure transactions. While some of these terms may appear to be synonymous, they all refer to distinct types or subsets of cryptocurrencies.
The difference between crypto tokens, altcoins, and cryptocurrency are:
- Cryptocurrency: Cryptocurrency is a general term that refers to any digital currency. Cryptocurrencies built on their own blockchain are called crypto coins.
- Altcoins: All cryptocurrencies are altcoins except Bitcoin, because they are alternative coins to Bitcoin, the first cryptocurrency.
- Tokens: A crypto token is a form of cryptocurrency that is not built on its own native blockchain. Instead, they are the cryptocurrencies that operate on another cryptocurrency’s blockchain, often designed to represent a specific value or utility on a blockchain network.