Although technically, «token» can be described as another term for «cryptocurrency», or «cryptoasset,» it is becoming more specific depending on the context. First, it is used to refer to all cryptocurrencies other thanBitcoin or Ethereum (even though technically they are tokens). The second describes digital assets that run on other cryptocurrencies’ blockchains, like many Decentralized Finance (or DeFi), tokens. Tokens can perform many functions. They can be used to make it possible for decentralized exchanges or sell rare items in videogames. They can be traded and held just like any other cryptocurrency.
A common word in cryptocurrency is «token». You might even hear Bitcoin called a «crypto token» because technically, all cryptoassets could also be considered tokens. The word has taken on two meanings that are so common that you might come across them.
- A «token» is often used to refer to any cryptocurrency other than Bitcoin or Ethereum (even though they are technically tokens). It’s helpful to have a term to describe other coins, as Bitcoin and Ethereum are the most popular cryptocurrencies. Altcoin is another word that might be used with the exact same meaning.
- Another increasingly popular meaning of «token» is to refer to cryptoassets running on top of another cryptocurrency’s blockchain. This usage is common if you are interested in decentralized financing (or DeFi). Although Bitcoin is a cryptocurrency, it has its own blockchain. DeFi tokens such as Chainlink or Aave run over, or leverage an existing blockchain (most commonly Ethereum’s).
- This second category of tokens allows decentralized applications to automate everything, from automating interest rates to selling virtual real estate. They can be traded or held like any other cryptocurrency.
What Is The Significance Of Tokens?
It’s likely that you will come across the term «token» a lot when researching cryptocurrency. Therefore, it is important to be familiar with its meanings. There are a few categories of cryptoassets which have «token» as their names, in addition to the ones in the section. These are just a few of them:
- DeFi tokens A new generation of crypto-based protocols has emerged that aims to replicate traditional financial-system functions such as lending and saving, trading, and insurance. These tokens can be traded or held as any other cryptocurrency, and they perform many functions.
- Governance tokens These tokens are specialized DeFi tokens which give holders the right to influence the future of an app or protocol. They (being decentralized and not having boards of directors) do not have any central authority. For example, the popular savings protocol Compound issues all users a token called Comp. The COMP token allows holders to vote on how Compound is improved. You get more votes the more COMP tokens that you have.
- Non-Fungible Tokens NFTs are ownership rights to a digital or real-world property. These tokens can be used to prevent digital creations from being copied or shared. This is something that anyone who has visited Torrent sites full of latest videos and movies will be able to understand. They can also be used to sell rare virtual assets, such as rare items in a game, or issue limited numbers of digital artworks.
- Security tokens Tokens are a new type of asset that aims to be the crypto equivalent to traditional securities such as stocks and bonds. They can be used to sell shares in companies (similar to fractional shares that are sold on conventional markets), or other enterprises without the need of a broker. Security tokens are being investigated by major companies and startups as an alternative method of funding.