As recently as the last few years, blockchain technology has gained enough traction that many people now know of cryptocurrencies like Bitcoin and Ethereum. Crypto coins have indeed changed the way we think of money and are a driving force behind the broader DeFi space. However, there is much more to the blockchain environment than just crypto coins. Namely, crypto tokens. Many people tend to confuse them and use the terms “crypto token” and “crypto coin" as synonyms.
And while they share a lot of similarities, there are some fine lines which are important. Even though these two concepts are associated to a certain degree to digital assets on a blockchain, when it comes to their functionality and purpose - they are not the same.
How Are Crypto Tokens Created?
Crypto tokens are a type of digital asset that startups or companies usually issue through processes like Initial Coin Offerings (ICOs) or Token Generation Events (TGEs). They represent a method for raising funds for further development via the exchange of these tokens with the premise that they will grow in value once the project goes live.
In this way, some crypto tokens are made available, to early adopters and investors, during the ICO stage, in exchange for fiat currency, or other established cryptocurrencies, such as Bitcoin or Ethereum. The project later uses the proceeds from the sale to build out their platform, while also increasing the demand for the tokens within their ecosystem. In other words, in relation to a project, crypto tokens function like currency to a country. It is the currency that is endorsed and in active circulation, where goods and services are exchanged within such an “ecosystem”.
A TGE, a relatively recent and more refined method, focuses specifically on the creation and distribution of tokens. Unlike ICOs, TGEs often emphasize compliance with regulations and offer more ample token utility from the start.
Types of Crypto Tokens
Even experienced degens confuse the definitions of cryptocurrency coins and tokens. The assertion that ‘every coin is a token, but not every token is a coin’ holds true. This can be rather confusing, but there is a reason behind this statement.
Crypto tokens play diverse roles in the blockchain ecosystem, but they differ depending on their function and based on their primary function. Here’s an overview of the most common types:
Fungible Tokens
Fungible tokens can be compared to traditional money in that they also do not have any one-of-a-kind uses – every unit has the same value as every other unit. This attitude is characteristic of most cryptocurrencies which are said to be “fungible” to the extent that they can change with ease to the other type within the same asset class. This is true with the case of Fiat currencies because one can also choose to cut off their conversion of Euros to their country’s Dollars and still maintain the currency in use. Cryptos such as Dogecoin and Ethereum are also considered in the sense that they can be interchanged with another crypto within the same category easily. Examples of fungible tokens are as listed:
- The Chainlink is a decentralized oracle network that enables smart contracts to interact with job and payment services. As a medium of exchange, LINK is used by node operators to pay individuals for the external data they legitimately upload on the blockchain which supports the Oracle network.
- Tether (USDT) is simply a dollar-backed stablecoin. It is generally used for margin trading, moving funds across exchanges, and reducing the effects of cryptocurrency market swings.
- USD Coin (USDC) is a stablecoin pegged to the US dollar, maintaining a 1:1 value ratio with the dollar. USDC is widely used in decentralized finance (DeFi) for lending and borrowing activities and serves as a low-risk asset during periods of high market volatility.
Non-Fungible Tokens (NFTs)
NFTs are assets that are truly unique in nature and differ from each other. They cannot be exchanged or replaced for one another as they are not the same (even if their price is). An NFT is one version of a digital product that is valuable because it carries a lot of information about an asset, including the primary owner. The data is coded into the digital asset itself, making it immutable since the information is stored on the blockchain. Some of the most recognized NFT projects are:
- CryptoKitties: One does not simply begin trading virtual cats without understanding CryptoKitties, which is possibly one of the earliest forms of NFTs that have users breed, collect, and trade virtual cats with different traits contained in the blockchain.
- Bored Ape Yacht Club: A hand-drawn illustration of one such Bored Ape NFT, The Bored Ape Yacht Club is made up of 10,000 unique Bored Apes which their owners have rightfully bought or earned plus certain privileges like attending specific events, making purchases and claiming pieces of virtual real estate.
- Decentraland (MANA): Similar to the virtual world of Second Life, Decentraland is a 3D online environment where the real estate is owned in the form of Non-Fungible Tokens. Within the ecosystem of Decentraland, there exists a currency known as MANA which is used to buy and sell virtual assets.
Security Tokens
Security tokens are strictly regulated by authorities around the world because they represent a share or investment. People contribute money to a crypto project in exchange for these tokens, which represent their share in the project and entitle them to a part of the generated revenue or profit. Some well-known security tokens are:
tZERO: A blockchain-based platform for trading tokenized securities. tZERO provides investors with fractional ownership of real-world assets like real estate and private equities.
Polymath: A platform that simplifies the creation and management of security tokens, ensuring they comply with regulatory standards. Polymath provides tools for token issuers to digitize traditional securities.
Utility Tokens
Utility tokens are the most popular type of crypto tokens as they are versatile and not so heavily regulated. They usually grant access to a blockchain service or product. They are tied to specific projects and enable interaction within a blockchain ecosystem, often at discounted or preferential rates. For example:
- Binance Coin (BNB): Initially created as a token to pay for discounted trading fees on the Binance exchange, BNB has evolved to power the Binance Smart Chain, enabling decentralized apps and smart contracts.
- Filecoin (FIL): FIL is the native token of the Filecoin network, a decentralized storage system. Users pay FIL to store and retrieve data, while storage providers earn FIL for contributing space to the network.
Governance Tokens
Governance tokens promote engagement within crypto projects through their decentralization. They make it possible for the holders to take part in the decision-making process enabling the community to help build the future of the projects.
- Uniswap (UNI): The holders of the uni token can decide the voting on protocol upgrades, change of the fee structure, and treasury distribution of the funds for the uniswap decentralized exchange (DEX).
- MakerDAO (MKR): MKR holders manage the Maker Protocol that issues and regulates the DAI stablecoin. These holders can cast votes and make decisions on things like changing collateral levels and establishing risk thresholds for different users.
All tokens have certain purposes in the cryptocurrency market. Certain of these tokens are established and are in circulation on centralized, decentralized exchanges, among others, while other types of such tokens strictly exist cashlessly within the system of a given project.
How Do Crypto Tokens Differ from Cryptocurrencies?
Crypto Tokens and crypto coins have a lot in common but it’s the differences that define their unique application and use cases. Crypto tokens are digital assets created for specific purposes, often within a particular project or community, that usually rely on existing blockchains. Crypto coins, on the other hand, are a subset of tokens and function as digital money, operating independently on their own blockchains.
Crypto Tokens
Tokens rely on existing blockchain platforms for their creation and functionality.
For example, Uniswap (UNI) and ApeCoin (APE) are tokens because they are built on the Ethereum blockchain (platform). Tokens serve particular functions within a project, service, community, or game. Tokens are issued and managed using smart contracts on existing platforms like Ethereum, Binance Smart Chain, or Polygon.
Crypto Coins
Coins are native cryptocurrencies that operate on their own dedicated blockchains.
For example, Ethereum (ETH) and Cardano (ADA) are coins because they are tied to their own blockchain networks. Coins run on their own blockchain, ensuring complete autonomy.
Coins are often used as a medium of exchange, similar to traditional currencies like dollars or euros.
They can also act as a store of value (e.g., Bitcoin) or fuel network operations (e.g., ETH as gas for transactions).
Crypto tokens play a central role in powering blockchain-based applications and ecosystems. They are essential in enabling functionality across key sectors such as decentralized finance (DeFi), gaming, non-fungible tokens (NFTs), and decentralized governance. By offering utility, value, and incentives, tokens drive user engagement and ecosystem growth.
DeFi (Decentralized Finance)
It’s challenging to separate DeFi from crypto and blockchain as both are integral components of this space but DeFi has become a self-sustainable segment. Coins are the lifeblood of that segment, where they enable activities like lending, borrowing, staking, and earning interest on digital assets.
- Aave (AAVE): Allows users to lend and borrow crypto assets, earning rewards for providing liquidity.
- Compound (COMP): Acts as both a governance token and a reward for users who participate in the lending and borrowing process.
Tokens in DeFi often incentivize participation through yield farming, staking rewards, or governance roles, encouraging users to actively engage with the platforms. It is worth noting that DeFi initially emerged on the Ethereum (ETH) blockchain, and to this day, more than 70% of DeFi assets are associated with ETH due to its robust smart contract capabilities. DeFi protocols offer immense benefits to investors by providing world-class decentralized financial services on a large scale. The performance of DeFi in the crypto market has the potential to make a game-changing impact in the digital world, transforming how we perceive and interact with financial systems.
NFTs and Gaming
Web3 gaming is the most rapidly growing multi-billion space that many consider a subset of DeFi. Web3 games expand on the core functionalities and gameplay of web2 games with the value-adding features of NFTs and tokens to give players more control over their in-game assets and information. That convergence of gaming and DeFi gave rise to GameFi - imagine a Defi project crafting an interactive virtual world where users engage in tasks and missions, and get rewarded with tokens for doing so. The result? An immersive, enthralling, and community-driven journey that captivates users, fostering widespread adoption. Gamification is appealing to both users and players, as DeFi projects cleverly design engaging NFT games and challenges that shower users with in-game tokens and NFTs. With virtual reality (VR), augmented reality (AR), and extended reality (XR) becoming more popular in Web3 gaming, players may now embark on missions and complete tasks to gain important prizes in a more immersive environment.
Examples:
- Axie Infinity (AXS): Used within the Axie Infinity ecosystem for rewards, breeding Axies, and participating in governance.
- Decentraland (MANA): Powers a virtual world where users can buy, sell, and build on virtual real estate.
These tokens add value to gaming ecosystems by creating real-world monetary incentives, fostering deeper player engagement, and enabling interoperability across different platforms and games.
Decentralized Governance
Tokens empower communities by enabling decentralized decision-making, allowing users to vote on platform updates, policy changes, or resource allocation. Community building is a skill and an art form, a real cornerstone of the DeFi industry's success. DeFi projects go beyond the transactional, crafting vibrant communities when they team up with loyal users and supporters, giving them an equal say in the future development of the project. This nurturing of community spirit sparks unwavering loyalty and drives the project to unparalleled triumph. To further engage and expand their communities, many DeFi platforms are integrating these features into mobile applications through iOS applications and Android applications. By creating custom mobile apps, DeFi projects allow users to easily participate in governance, vote on key decisions, and stay connected with the community in real-time, all from the convenience of their smartphones.
To fully engage these communities, integrating secure and user-friendly DeFi wallets ensures seamless participation in governance and asset management, enhancing the overall user experience and trust in the platform.
Examples:
- Uniswap (UNI): Grants governance rights to token holders, enabling them to shape the future of the decentralized exchange.
- Maker (MKR): Allows token holders to influence decisions regarding MakerDAO’s lending protocol.
Governance tokens ensure that users have a stake in the success of the ecosystem, creating a more democratic and community-driven structure.
Incentives and Tokenomics
Tokens motivate users to engage in different ways such as benefits, governance, or special services. This model ensures that the users participate fully in the growth and advancement of the ecosystem. The concept of Tokenomics is the economic system and rationale that exists behind tokens. It is important for:
- Facilitating Adoption: When there is a scarcity introduced (e.g., token burns) or when benefits are provided (e.g., staking yields).
- Assuring Health Of The Ecosystem: To ensure viability in the long run, there is a need to manage supply and demand.
Whereas the architecture of the system is such that the tokenomics incentivizes the users to behave as the platform wants them to, creating loyalty and enhancing the user base. For businesses looking to create a solid framework for their token systems, tokenomics creation plays a key role in developing strategies that align with the overall goals of the platform.
How to Buy, Store, and Trade Crypto Tokens
After learning the basics, buying, storing, and exchanging crypto tokens is easy. First, choose a platform to buy tokens. Most beginners choose Binance or Coinbase, which have user-friendly interfaces and a vast choice of coins. Direct wallet-to-wallet trading on DEXs like Uniswap gives more control and access to specialized tokens. After selecting a platform, you must register, complete KYC, and deposit funds. DEXs allow you to connect your crypto wallet and load it with Ethereum or Binance Coin, unlike centralized exchanges that require a bank account or credit card. Search for the token, order it, then confirm the purchase after your account or wallet is loaded.
Tokens must be stored securely after purchase. Hot and cold wallets hold crypto tokens. Online hot wallets like MetaMask and Coinbase Wallet make frequent trading easy. Their hacking vulnerability is greater. Offline cold wallets like Ledger or Trezor are safer for long-term storage or large holdings. Regardless of wallet type, private keys and seed phrases must be protected or you may lose token access permanently. You can move tokens from the exchange to your wallet using its public address after choosing a wallet. Move your assets off the exchange for added security.
Trading tokens requires platform selection, market analysis, and transaction management. Limit orders and user-friendly interfaces are available on centralized exchanges, but privacy and direct asset ownership are prioritized on decentralized exchanges. CoinGecko and CoinMarketCap should be used to track price movements and trading volumes before trading. Choose a trading pair, like ETH/USDT, enter the trade details, and confirm the transaction. Keep track of your portfolio, examine your holdings often, and diversify to reduce risk when purchasing or selling.
Understand these methods to confidently buy, store, and trade crypto tokens and participate in the blockchain economy.
