When you read up on crypto, you will undoubtedly come across the term "token" sooner or later. What does a token mean in crypto, and why is it important? In this article, we briefly discuss the meaning and applications of tokens.
What are tokens?
A token is an object that represents a certain value. For example, think of a round plastic "coin" at festivals: they can be exchanged for drinks or food. So this piece of plastic (the token) represents a monetary value.
In crypto, a token also represents a certain value. There are different types of tokens, which can also represent different values. Some tokens grant their holders voting rights. Other tokens are used as currency. Combinations of multiple uses or values are also possible.
No official dictionary has formally defined the exact meaning of a token in crypto yet. As a result, some say any crypto is a token. But the majority of crypto-minded people use the following definition:
A token is a crypto that runs on the blockchain of another cryptocurrency.
Examples of well-known tokens
Nowadays it is relatively easy for anyone with a little technical aptitude to start their cryptocurrency. Usually, these new cryptos are tokens: cryptos on another cryptocurrency's blockchain. This way, the creator does not have to build an entire blockchain themselves. Hundreds, perhaps thousands of new tokens are launched every day. Often without any utility, vision, or reliability.
But some tokens do play a very important role in the crypto ecosystem, with a solid setup, vision, and reliable team behind them. Those looking to invest in tokens would do well to research these kinds of facets.
The Ethereum blockchain in particular has many tokens (ERC-20 tokens), but so does Solana, for example. Among some of the best-known tokens are Uniswap and Chainlink. In addition to tokens, they are also altcoins.
Different types of tokens
Within crypto tokens, several "types" can be distinguished. We will discuss some well-known examples:
- DeFi tokens are cryptocurrencies that are native to decentralized platforms and use smart contracts, which allow users to access various financial applications on the blockchain. Examples include DAI and UNI.
- A governance token is a cryptocurrency that gives holders the right to participate in the governance of a protocol. Examples include 0x and MANA.
- Non-fungible tokens (also known as NFTs) are digital assets tokenized via the blockchain. They can be traded for money, cryptocurrencies, or other NFTs, and represent unique ownership rights to associated assets such as artwork, music, or collectibles. This makes them quite different from other crypto tokens, but still worth naming.
- A security token is not about safety, but securities in the financial sense of the word. These are meant to be a crypto equivalent of traditional securities such as stocks.
The role of tokens in the crypto ecosystem
There are all kinds of tokens. And as many as tens or hundreds of thousands of tokens in total. Many of them have been inactive for ages, or have (virtually) no trading volume on them. Other tokens are world-famous and widely used. Some tokens have incredibly useful applications in the real world. Therefore, one cannot say that tokens are good or bad, or useful or useless. That varies entirely. One thing is for sure: tokens bring a lot of choices to the crypto markets. As an investor, it remains important to do proper research before investing.
The information provided in our articles is intended solely for general informational purposes and does not constitute (financial) advice.