What Is a Crypto Token?

By Colin Dodds · June 16, 2021 · 5 minute read

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What Is a Crypto Token?

Both cryptocurrency and tokens are blockchain-based digital assets—but they are not the same thing. Yet as the public becomes increasingly aware of blockchain technology and more people invest in cryptocurrency, confusion swirls around the difference between the two assets.

What Are Crypto Tokens?

Cryptographic tokens are programmable assets that can be developed and recorded on existing blockchains, as a special-access smart contract.

Tokens operate within a pre-existing blockchain to allow for the creation and execution of unique smart contracts that often deliver ownership of assets outside of the blockchain network. Tokens can represent units of value—including real-world items like electricity, money, points, coins, digital assets, and more—and can be sent and received.

ERC-20 tokens exist on the Ethereum network, NEP-5 tokens are on the NEO cryptocurrency network. The tokens live on the blockchain of those currencies, but are not the same as the coins those currencies use as their denomination.

Those tokens, written into the smart contract of the underlying blockchain of the cryptocurrency, are only accessible by the person with the private key for the token. They allow people to create new assets, whose ownership and scarcity can be verified using blockchain technology.

Crypto Tokens vs. Coins: What is the Difference?

Coins—for example, Bitcoin and Litecoin—are built on their own blockchain and are a store of value, intended as a form of currency. Generally, any blockchain-based cryptocurrency that is not Bitcoin is referred to as an altcoin.

Tokens are built on an existing blockchain and while they aren’t currency they can represent other fungible and non-fungible items of value, like points, coins, or even a piece of artwork. One example of a token is the Basic Attention Token, or BAT.

Because crypto coins are more straightforward—they’re a form of currency—they’re often easier to understand than crypto tokens. Below, we’ll go over what crypto tokens are and how they work.

How Do Crypto Tokens Work?

Blockchain uses a decentralized, or distributed, ledger, which resides on a vast array of independent computers to track transactions. Each node organizes new data into blocks, and chains them together in an “append only” mode. That append-only structure means no one on any node can alter or delete the data from earlier blocks. They can only add to the chain, which is one of the core security features of blockchain.

Cryptocurrency tokens offer the append-only secure record of cryptocurrency, connected with a special-access contract, which can connect to all manner of assets. The special-access contract with the tokens can give users the rights to assets such as cash, crypto coins, rewards points, or even digital media such as music, art, a video clip, or a movie. The tokens create the possibility of owning a blockchain-verified private smart contract connected to that asset.

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Different Types of Crypto Tokens

Currently, there are four main categories of tokens: payment tokens, utility tokens, security tokens, and non-fungible tokens. Below we’ll dive deeper into each one.

Payment Tokens

Most of the best known and most widely used forms of cryptocurrency are payment tokens. These crypto tokens are used to buy and sell, just like the U.S. Dollar or the Euro—except they’re not backed by a specific government.

Payment tokens exist within the blockchain of crypto networks like Bitcoin, Monero, and Ethereum, and represent units of value that can be exchanged for other currencies. There are also third-party custodians or exchanges that convert payment tokens into legal tender currencies such as the dollar.

Increasingly though, people have begun using these tokens to buy goods and services, though the overall number of merchants who accept them is still relatively small.

Utility Tokens

Utility tokens give their owners access to a product or service that either exists or is in development. They’re most commonly used as a fundraising vehicle for ICOs (Initial Coin Offerings), as a placeholder for the crypto coins the purchasers will receive when the new coins eventually go live on the blockchain.

The name for these tokens comes from the fact that they can be used to obtain either a good or service offered by the issuer. Their existence on an existing blockchain means that the owners can be verified, and also that they can be easily exchanged. During the 2017 cryptocurrency boom, when hundreds of crypto firms were planning new ICOs, they issued ERC-20 utility tokens on the Ethereum blockchain as a placeholder for prospective investors in their soon-to-launch coins.

Security Tokens

Security tokens offer rights and obligations to securities like stocks and bonds. Most often, a security token represents a share in the company that issued it. They can represent legal ownership of an asset, or a portion of an asset, like real estate, stocks, ETFs, and so on.

As such, they’re more heavily regulated than other tokens. Companies might issue security tokens instead of traditional shares of stock to raise money cheaply, or because the tokens offer instant settlement and easier cross-border trading.

Non-fungible Tokens

Also known as NFTs, these tokens have made the news lately because of the eye-popping sales prices of single NFTs connected with works of art, individual tweets, and sports memorabilia. They exist on pre-existing crypto networks, with ETH being one of the most popular.

These tokens have private contracts that can be clearly distinguished from any other token in existence. Because of that feature, they are used by athletes, artists, musicians and other creators as a way to connect with collectors, who see them as digital one-of-a-kind assets.

NFTs have opened up new markets for digital art and memorabilia, because while the purchaser can still duplicate the underlying media, they can’t copy, sell or pirate it. Some people have also issued NFTs that confer ownership of unique non-digital assets, such as real estate.

The Takeaway

Blockchain offers a unique way to buy and sell just about everything, as well as new ways to verify ownership of assets. Crypto coins function as the currency on these platforms, and crypto tokens serve a variety of uses—representing a wide range of units of value, with the ability to be securely sent and received.

Photo credit: iStock/jpgfactory

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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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