A beginner’s guide to crypto tokens
You might have realized the increased use of the term crypto tokens in the blockchain communities, Let’s understand what they are and how they come to be identified in the simplest way
What is a crypto token?
A crypto token is a digital value unit representing an asset or utility. Crypto tokens are built on existing Layer one blockchains like Bitcoin, Ethereum and other altcoins like Ripple and Litecoin protocols.
Tokens can be used for purposes like making Decentralized Finance Possible (DEFi). They can be used to raise funds or to give access to particular services. Some tokens can even represent coins on a different network. Such tokens are called “wrapped tokens” and follow the price of the underlying asset.
Examples of tokens
- Tether
- USD Coin
- Binance USD
- Wrapped Bitcoin
- Shiba Inu
- Chainlink
Token Standards
Token standards refer to what a token should contain in its smart contract to be referred to as a token take it as the rules governing the creation of tokens, we shall focus on tokens created on Ethereum which is ERC (Ethereum Request for Comment)
ERC-20
This is a standard for fungible tokens and it means all tokens are the same in type, for instance, ChainLink has LINK token which is an ERC-20 token on the Ethereum network and servers as a currency for the chainlink network, each issued token is always equal to any other LINK token.
ERC-721
This is a standard for non-fungible tokens (NFT), which means this can’t be exchanged for other tokens of the same type. They are unique and cannot be replaced by another token. They have unique identifiers or token IDs, and their own set of metadata. This metadata can include information such as the name of the token, the creator, the date of creation, and any other relevant information. They represent digital assets like collectables, art, music albums and game items. This provides province of ownership easy since they can’t be duplicated.
Types of Tokens
Payment Tokens
These are tokens designed in a way they can be used as a medium of exchange for goods and services. For example, a USDT token that’s is designed to be stable in value with each token backed by the US dollar.
Utility Tokens
These tokens are designed to provide access to a service or product to their holders and their value is derived from the demand for that service. They can be used to incentives users to participate in a network and can be traded on exchanges. for example BNB on the Binace Smart Chain which is used to pay for trading fees and transactions on Binace.
Governance Tokens
These tokens are designed to permit holders to participate in the decision-making process for a blockchain project. Holders can vote on proposals or changes to the network and are often incentivised. For example, COMP is used for governance of the Compound protocol.
Security Tokens
Security tokens are digital tokens that represent ownership of a particular asset, such as equity or debt in a company. They are subject to securities laws and regulations and require registration with regulatory authorities. For example, TZEROP was launched by an e-commerce firm that used to pay owners dividends.
Crypto tokens are digital representations of interest in an asset or used to facilitate transactions on a blockchain. They are often confused with cryptocurrency because they are also tradeable and exchangeable. Don’t forget to follow and subscribe for more articles about blockchain weekly.
