What is a crypto token? — A beginners guide
The terms coin, token, and currency all represent crypto assets. The difference between cryptocurrency and crypto tokens is that tokens operate off an existing blockchain rather than as an essential part of a unique one.
Ether, for example, is an essential part of the Ethereum blockchain, whereas stable coins like Tether exist in Ethereum’s blockchain as a separate cryptocurrency.
Using crypto tokens, you could access a product or service (utility tokens), sell and buy digital artworks (NFT), or even invest in real-world assets (security tokens).
So, What is a crypto token? According to Investopedia, A token is a
cryptocurrency or a unit of one.
How do crypto tokens work?
Cryptocurrency tokens can be bought, sold or stored in a crypto wallet like other cryptocurrencies.
All token transactions are processed by the blockchain that they operate under. Crypto tokens serve many purposes aside from being a means of exchange, such as:
Government Tokens: These tokens give the buyer voting rights in an upcoming or existing crypto project. As the name implies, these token holders can vote on proposals to determine the project’s future. The more tokens you hold, the more voting power you wield. It’s very similar to buying stocks in a company. If you buy enough stocks, you wield significant influence over the organization’s proceedings.
Decentralized Finance(Defi) Tokens: These refer to decentralized
financial systems built on blockchain technology. They provide decentralized
financial services. For example, If Sunny needs a loan, he can put up his
tokens as collateral on a Defi platform, and depending on the platform he
chooses, he is most likely to get the loan.
Reward tokens: This is for the previously mentioned Defi platforms. These tokens are given to the loaners as an incentive. So if you loan out your financial assets, you get a certain amount of crypto tokens as a reward. These tokens can be used in the Defi platform and in some cases, outside the platform as well.
Non-fungible tokens: This type of token represents ownership over an asset. The ownership information is stored in the token. Think of it as a Deed to a property. The asset could be anything from books, CDs, etc.
Security tokens: Similar to stable coins, these tokens represent real-world assets. Buying a security token is similar to purchasing a fraction of a real-world asset like real estate, bonds, stocks etc. It is a way of recording an ownership stake in an asset.
Utility tokens: This type of token is created to fund the development of a crypto project and can be later used to buy goods and services offered by the token’s issuer.
Cryptocurrency vs Altcoin vs Token
We’ve often heard people confuse these terms for one another, so here are their definitions for clarification.
A cryptocurrency is a decentralized digital currency. It exists in a blockchain
and operates using cryptography.
An altcoin is any cryptocurrency that came after the release
of Bitcoin in 2009. The term altcoin is a combination of two words. Alt as in
alternative and coin as in cryptocurrency.
A crypto token is a cryptocurrency or a unit of one that doesn’t own its blockchain. It is built on a preexisting blockchain.
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