Everything you need to know about tokens
Cryptocurrencies, coins, tokens, and the difference between these three are just some of the first things you want to learn about on the first dip into the crypto waters. Especially because many tend to use these terms interchangeably. Let’s settle this once and for all.
A cryptocurrency is basically a digital currency. Transactions done with cryptocurrencies are more secure than traditional fiat ones, thanks to being recorded in a decentralized ledger — blockchain. Cryptocurrencies have their own native blockchain, for example, Bitcoin (BTC).
The biggest difference between a cryptocurrency and a token is that cryptocurrencies are the native asset of a blockchain (for example, Bitcoin or Ethereum), while tokens are built on existing blockchains, using smart contracts.
Altcoins are associated with any cryptocurrency apart from Bitcoin. Altcoins and tokens’ structures are the main reason to separate the two: altcoins are cryptocurrencies with their own blockchain, while tokens, again, operate on top of a blockchain that facilitates the creation of decentralized applications.
Token use cases:
Utility tokens are one of the most popular token use cases. Holders can access a blockchain-based product or service, including payments. Some compare utility tokens to vouchers or coupons. For example, it can be “exchanged” for access to decentralized applications (dApps) or for smart contracts to be executed on the blockchain. Utility tokens are the most common type of use case, since because most of the initial offerings that took place during the 2017 initial offering boom used utility tokens.
Another popular type is governance tokens that represent voting on a blockchain that allows distributing the power of making major decisions to the community. They provide token holders with certain rights that influence a protocol’s general direction, including ways of developing new projects, possible integrations, and so on.
Other types of tokens include security tokens that represent transferred ownership rights or asset value to a blockchain token. Put simply, a security token represents a stake in an external asset or enterprise, serving the same purpose as stocks, bonds, and other equities.
There are also social tokens that are based on the activities of particular creators and their communities and so on. Most commonly, they allow members of said communities to unlock specific engagements or experiences. Last but not least — meme tokens that were created as a joke that “was taken too far” and now mainly exist to be traded. They do not have an economic or business use case or utility.
Now, there’s another classification you need to know about.
Types of tokens
Fungible tokens VS. Non-fungible tokens
You’ve probably seen the NFT abbreviation quite a lot. NFT stands for a non-fungible token. There are, of course, fungible ones too.
The main difference between these is that non-fungible tokens are primarily different and unique, while fungible ones are not. For example, 1 Bitcoin is worth 1 Bitcoin no matter what crypto exchange you choose, just like 1 euro will be worth 1 euro in any country.
Again, NFTs are all one of a kind and investors can prove ownership of one. While fungible tokens store value, non-fungible tokens store data, for instance, an artwork (Bored Apes is one of the examples of a collection of NFTs).
Investors can prove ownership over tokens. This is possible thanks to the underlying blockchain. It allows virtually anybody to become a token owner. Different people decide to start holding tokens for different reasons, for example, holders of NFTs might believe that prices will go up and they will profit by selling their tokens. There are also ways to earn passive income by staking or farming tokens, taking part in airdrop campaigns, and so on.
A Token’s contract can include a range of useful functions for token holders. Here are just a few of them:
- Burn — calling to remove tokens from circulation in a bid to reduce the supply;
- Pause. This function allows the owner to temporarily prevent all kinds of transactions;
- Reflection of tokens refers to a function that redistributes token tax/commission on transactions among holders, with the process financed by a percentage tax on any transaction in the native token;
- Auto LP saves up a certain token commission on the contract. Once a predetermined amount has been achieved, tokens will be added to the liquidity pool automatically;
- Mint — emission of new tokens;
- Auto burn is a function that burns a percentage of every transaction automatically.
The framework behind the issuance of tokens differs for all networks. As a result, developers created guidelines for how these tokens are supposed to function. They are used for creating new tokens by the rules set out by the blockchain.
All token standards are referred to by an abbreviation. For example, BEP20, one of the most popular token standards, stands for Binance Smart Chain Evolution Proposal. Each token on every blockchain adheres to a certain token standard. If you learn how the processes behind trading work and more about standards’ blockchains, you will be able to quickly identify the correct assets for your purposes.
For example, standards ERC721 and ERC1155 are reserved for NFTs. ERC1155 allows batch transfers of NFTs, while ERC721 considers each token to have a separate ID on the contract.
Or let’s take the ERC20 standard. Those smart contracts are used to execute various routines and functions in digital space, with many of them too used to create non-fungible tokens. However, many hold an opinion that this token standard suffers from critical issues, including the lack of an event handling mechanism in the ERC20 standard. That’s how ERC223, a superset of ERC20, came about. This standard is often regarded as a more secure one, as it does not allow token transfers to contracts that do not explicitly support token reception.