The term “token” is often seen in the context of cryptocurrencies. In truth, Bitcoin may be regarded as a “crypto token” or something similar, since all crypto assets can potentially be represented as tokens. However, the term took on two distinct meanings that were widespread enough to have a high likelihood of occurrence.
- Typically, a “token” refers to any cryptocurrency except Bitcoin and Ethereum (although technically they are also tokens). Because Bitcoin and Ethereum are by far the two largest cryptocurrencies, it is necessary to have a term for the universe of other coins. (Another term you may see with a similar meaning is “altcoin.)
- The second increasingly prevalent definition of “token” has an even more narrow connotation: a coin operating on top of the blockchain of another cryptocurrency. This application will appeal to anyone interested in decentralised finance (or DeFi). While cryptocurrencies such as Bitcoin have their own dedicated blockchain, DeFi tokens such as Chainlink and Aave operate on or use an existing blockchain, Ethereum being the most prevalent.
- Tokens in this second category allow decentralised programmes automate interest rates and trade virtual real estate capital, among other things. In addition, they may be owned or sold like any other cryptocurrency.
Why are tokens important?
Given that you will often encounter the term while looking for cryptocurrencies, it is good to be aware of its widespread meanings. In addition to the definitions provided in the preceding section, there are other kinds of cryptocurrencies whose names include the word “token.” Here are several examples:
- DeFi Tokens In recent years, a new universe of cryptocurrency-based protocols designed to replicate conventional financial system activities has evolved (loan and savings, insurance, transactions). These protocols issue tokens that fulfil a broad range of services, but may also be exchanged and kept like other cryptocurrencies.
- Governance Tokens Specialized DeFi coins that provide their holders a vote in the future of a protocol or application but have no board of directors or other central authority due to their decentralisation. For instance, the popular savings system Compound provides a token called COMP to all users. This token grants its holders the ability to vote on how the Compound is updated. The more your COMP tokens, the greater your number of votes.
- Non-fungible tokens (NFTs) NFTs represent ownership rights over a particular digital or physical item. They may be used to make it challenging to duplicate and distribute digital works (an issue that anyone who has ever visited a Torrent website with the latest movies and video games will understand). In addition, they were used to distribute a limited quantity of digital works or to sell one-of-a-kind virtual assets, such as uncommon items in a video game.
- Protection Tokens Security tokens are a new asset class designed to be the cryptocurrency counterpart of conventional securities such as stocks and bonds. The primary purpose is to sell shares in a firm (similar to shares offered on traditional markets) or in other companies (such as real estate capital) without a broker. Large corporations and startups have researched security tokens as a possible alternative to conventional financing sources.