Cryptocurrency or crypto-assets can technically be called tokens. However, increasingly there are different meanings among tokens depending on the context. Usually, cryptocurrencies are defined as any cryptocurrency that isn’t Bitcoin or Ethereum (even though they are technically tokens).
Another way to use digital assets is to describe those that run on other cryptocurrencies blockchains, such as decentralized finance tokens (or DeFis). There is a wide range of possible functions for tokens, from helping create decentralized exchanges to helping to sell rare items in games. However, all tokens can be held in an account, just like any cryptocurrency.
You tend to hear the word “token” a lot about cryptocurrencies. You may listen to Bitcoin referred to as a “crypto token” or something similar since – technically – all crypto assets could also be classified as tokens. There are two specific meanings for the word that have become increasingly common, and there’s a good chance you’ll come across them.
- Besides Bitcoin and Ethereum, tokens often refer to any cryptocurrency other than those two (even though they are technically tokens as well). Having a word to describe the universe of cryptocurrencies beyond Bitcoin and Ethereum is helpful since they are the two most prominent cryptocurrencies. An alternative word for a cryptocurrency called “altcoin” has nearly the same meaning.
- In addition to these two common meanings for “token,” there is an ever more specific meaning associated with it: to describe crypto assets that run on top of another cryptocurrency’s blockchain. If you gain an interest in decentralized finance (or DeFi), you’ll discover this usage. The main difference between a cryptocurrency like Bitcoin and a DeFi token like Chainlink or Aave is that the former runs on top of (or leverages) an existing blockchain, typically Ethereum’s.
- The tokens in this second category are used to automate interest rates to sell virtual land. These tokens can also be traded or held like other cryptocurrencies.
Why are tokens important?
Because you’ll be encountering the word quite often when researching cryptocurrencies, it’s helpful to understand how it’s sometimes used. However, beyond the broad definitions provided in this section, a few categories of crypto-assets carry the word “token” in their names. Some examples are as follows:
- Non-Fungible Tokens (NFTs): The NFT represents the ownership rights to an exclusive digital or real-world asset. Digital creators can use them to thwart the copying and sharing of their creations (a problem that anyone who has ever visited a Torrent site filled with the latest movies and games knows well). In video games, you can use them to sell rare items like rare virtual items or issue a limited number of digital artworks.
- DeFi tokens: Since the advent of cryptocurrency, a new realm of protocols has developed that replicate traditional functions of the financial system (saving and lending, insurance, and trading). Protocols such as these issue tokens with multiple functions and are tradable and holdable like other cryptocurrencies.
- Security tokens: As cryptocurrency equivalents of traditional securities such as stocks and bonds, security tokens aim to substitute conventional assets like stocks and bonds. Generally, they are used to help people sell shares in a company (similar to the way shares or fractional shares are sold through conventional markets) or other enterprises (for example, real estate) without the need for a broker. According to reports, major companies and startups are looking into security tokens as an alternative to conventional fundraising methods.
- Governance tokens: DeFi tokens are specially designed tokens that allow holders to contribute to developing protocols or apps, which are decentralized and therefore do not have boards of directors. The popular savings protocol Compound, for example, provides all users with an independent token called COMP. This token grants users an opportunity to vote on how the protocol is enhanced. You get one vote for every COMP you own; for every COMP you own, you get two votes.