What is a Token? The 2023 Guide to How Crypto Tokens Work

What is a token? In 2023, the crypto market is still growing by the day, with many ups and downs. So many want to learn how it all works, and what’s the best way to crypto

Cryptomarket has a lot of types of tokens as well, but not everyone knows how they work or why they’re so popular. You’ve probably heard of them, but you didn’t know they were tokens.

If you want to find out more about tokens, look no further! Read this article and learn all about different types of tokens and where they fit into the larger cryptocurrency ecosystem.

What are Tokens in Crypto Trading?

Tokens can be exchanged for other tokens on a blockchain network, fiat currency, or other digital assets. So, what is a token? It'sany digital asset you can tokenize and use on the existing blckchain. Like a cryptocurrency, they don’t represent an ownership stake in an underlying company or project, but they offer some utility and value to their owners.

For example, Ethereum (ETH) is the most popular platform for issuing tokens, and there are thousands of different types of Ethereum-based tokens available today. Some represent products or services, and others represent equity in companies.

A token can also be used as an access mechanism: you might need to use your cryptocurrency wallet to pay for something online or at a store like Starbucks. It’s becoming more common for companies and businesses to accept payments in crypto, and we can expect it to expand in the future.

History of Crypto Tokens

A token is a digital asset that represents anything of value. It can be used as a currency, or as an incentive to interact with a particular product or service. So, where did crypto tokens come from, and how did they evolve to become the phenomenon they are today?

A year after the global financial crisis of 2007, an organization named Satoshi Nakamoto presented Bitcoin and introduced a technology called blockchain.

Even today, Bitcoin is the number one cryptocurrency and holds the most value. As a token in cryptocurrency, people didn’t know what Bitcoin could do, and we have a famous case where a man bought two pizzas with Bitcoin back in 2010 for 10,000 Bitcoins.

Back then, Bitcoin wasn’t much, but now it would be worth around $24,000,000—that’s how much the market has expanded.

The first crypto token to gain widespread popularity was Ethereum’s ERC-20 token, which was introduced in 2015. This token standard allowed developers to create their own tokens on top of the Ethereum blockchain, opening up a world of new possibilities.

Since then, the crypto token landscape has exploded, with thousands of new tokens being introduced on a regular basis. Some of these tokens are for specific purposes, such as facilitating transactions on a particular blockchain or providing access to certain services or applications.

Others are designed as investment vehicles or stores of value, much like traditional stocks or commodities.

Tokens have been around since the early days of the internet, but they didn’t become popular until cryptocurrencies hit their stride in 2017 and 2018. Ethereum was the first blockchain platform to use tokens, but now many other networks are following this trend because of its efficiency and simplicity.

How Tokens Work

Tokens are created on top of blockchain technology. This means they’re secured by cryptography and don’t require intermediaries like banks or governments to verify transactions.

The most common types of tokens are cryptocurrencies like Bitcoin, Ethereum, and Litecoin. There are also security tokens that represent ownership in an underlying asset (e.g., real estate), andstablecoins backed by fiat currency instead of being tied directly to their value as with most other cryptocurrencies.

Cryptocurrency tokens offer both value and utility. They can represent an asset like gold or real estate. They can represent a utility, like access to your favorite online game, or they can represent a right, such as ownership over an investment fund or company.

In addition to allowing investors to diversify their portfolios, cryptocurrency tokens provide businesses with new ways of raising capital through ICOs (Initial Coin Offerings). ICO is a process of offering tokens to investors for purchase.

Types of Tokens

There are many types of tokens, and here we’ll try to explain the most common ones.

#1. Utility and Payment Tokens

The easiest way to understand utility tokens is to look at them as a coupon or voucher. A utility token can grant you access to a specific service, depending on who made it. Every token will have a different use, depending on who distributes it.

You can easily gain access to any product or service if you purchase and then exchange a token made by the service you want to use.

Utility tokens can be handy because you can get various discounts and sometimes free service as long as you hold the token. Keep in mind that holding a token doesn’t mean you have ownership over it.

The whole point of utility tokens is that as long as you hold them, you have the right to services issued by the token makers, which is why they’re called “coupons.”

Decentralization also applies to utility tokens, and it can be useful to you on almost any occasion. Not being under any financial regulations means more freedom for what you want to exchange your token for and when. On top of that, with utility tokens, you can access decentralized storage or use them as a blockchain currency.

This can lead you to think you can use any utility tokens for payment, but that’s not the case. Payment tokens are a completely different category and the most common type of token people use.

Payment tokens are great for buying or selling on digital platforms without involving a third party. Many prefer faster transactions without the involvement of any bank or financial institution. However, there are risks of not getting access to services you paid for, and you can’t invest in them. Payment tokens are a combination of various other tokens on the market.

#2. Security Tokens

Security tokens are similar to utility ones, but they represent the ownership of an asset rather than access or use rights. These include equity shares, real estate deeds, and other financial instruments like loans or bonds. They’re more like traditional securities, except instead of being issued on paper and becoming certificates, they’re becoming tokens by being issued as digital assets.

Unlike utility tokens, security tokens have to be under control because they derive their value from an external source. Since you can trade them only under financially controlled circumstances, that’s how they got their name.

The founders are responsible for every financial task, whether it's a transaction, an exchange, or insurance. The financial regulation guarantees user investments and funds, and if something goes wrong, founders are held responsible.

Security Token Offering (STO) is short for a token that’s issued on a blockchain, representing a stake or shares in an external asset. STO application depends on what investors need. It can be management transparency or instant settlement.

Subcategories of security tokens are divided into two parts: equity tokens and asset-backed tokens. Equity tokens are transferred digitally, but in their nature, they’re most similar to traditional stocks. Asset-backed tokens have real-world commodities as their underlying value, like gold or real estate, and you can trade them as well.

#3. Commodity Tokens

You can tell by the name that commodity tokens are connected to real-world commodities. It can be precious metals, stocks, bonds, or real estate. Commodity tokens are a way to represent these assets in the digital world.

Commodity tokens are commonly issued as security tokens because of their nature. Transactions have to be transparent and as safe as possible. If you’re trying to create a commodity token, you will have to do it through an ETO (Equity Token Offer).

A popular example of a commodity token is converting company shares into digital assets. When you tokenize and trade a company share on the blockchain, you have a commodity token that you can buy or sell on the crypto market.

Commodity tokenization can include creating crypto commodities from oil, sugar, spices, wheat, flour, or natural gas. Whatever exists in the real world can be tokenized and made into a commodity token.

#4. Non-Fungible Tokens

NFTs have become quite popular in the past couple of years, whether they hold real value or they’re just a meme, like the infamous Shiba Inu, for example. Non-fungible tokens usually represent a form of art, even though they’re developed like any other token

The first NFT wasQuantum, created and minted back in 2014 by Kevin McCoy. NFTs can be anything from memes, gifs, Banksy paintings, and tweets to music, fashion items, or films. What makes them a token is the fact that they have digital value on the blockchain and represent a digital certificate of ownership.

The holder of a specific NFT can limit tokens to add value, making them a special edition. The most valuable NFTs are the ones that few people own and that can't be reproduced more than a few times. It can be extremely useful to artists to monetize their art and gain more value through NFTs.

#5. Privacy Tokens

A privacy token is an umbrella term for cryptocurrencies you can use for stronger security because their code is stronger than, for example, Ethereum’s.

Many people prefer stronger security during crypto transactions, and privacy tokens can give them exactly that. Transactions prone to scams or theft can have tighter security thanks to the better code privacy tokens offer.

Many techniques can be used to secure your transactions, such as coin mixing and offline transactions. Of course, this is an additional layer of security on top of the traditional ones developers use for mainstream crypto (not connecting real names to a crypto asset, for example).

Tokens vs. Cryptocurrency

While both tokens and cryptocurrency are digital assets, they’re not the same thing. You can define crypto as native to a specific blockchain, while tokens are digital assets you need to add on top of the blockchain protocol.

That’s why tokens and cryptocurrencies are similar, but you should consider them an entirely different digital asset class. The main difference is rooted in how they’re built.

Tokens don’t have their own blockchains—they can be added on top of blockchain technology. You cannot mine a crypto token while any cryptocurrency exists, thanks to mining. On the other hand, tokens can be minted. Minting occurs on the blockchain and creates new tokens.

A token is a representation of an asset, and you can use it for different benefits. They’re transparent and programmable, and you will see the use of smart contracts in almost any type of crypto token usage. The crypto token ecosystem is continuously growing thanks to its straightforward use and adjustability.

The biggest advantage of tokens is that you don’t need a new blockchain to create a token. Since you can represent any coin across various blockchains, the market experiences less friction, as tokens are easier to use.

Tokens vs. Crypto Coins

Unlike tokens, crypto coins have to be connected to the blockchain they’re on. That’s why many opt for tokens because it’s easier and costs less than focusing on creating a new blockchain and spending your time and money so you can create a crypto coin.

Bitcoin is a prime example of a crypto coin and an indicator of how different tokens are from coins. While Bitcoin has its own independent network and pays all fees on the same blockchain, any crypto token can use a different blockchain and rely on its technology for accomplishing transactions.

Tokens have multiple purposes, and their number depends on the project they’re on. While you can use tokens for various services, a token can be a representative of a specific coin on a different network. If that occurs, it’s called a “wrapped token.”

While Bitcoin (BTC) is the best representation of a crypto coin, a stablecoin is the best example of a wrapped token. Its main role is to follow the price of the U.S. dollar.

Key Takeaways

Tokens can be useful and fun, depending on what you want them for. Whatever the case, it’s good to know their uses and the different ways you can use them. Nowadays, tokens are easier to obtain and use since you don’t need to make a blockchain from scratch to create a token.

Whether you want to collect tokens like NFTs or use them for utilities, crypto tokens are a great way of dealing with equities or services without a third party. On the other hand, if you want added security measures, you can choose a token with additional security layers, so you don’t have to worry about data breaches.

Crypto Tokens FAQ

#1. Is Bitcoin a token?

Bitcoin is a cryptocurrency that has its own unique blockchain and ecosystem within the market. Bitcoin needs its own blockchain, where you can buy, sell, mine, or store value.

#2. What are the types of tokens?

There are three main types of tokens: equity, utility, and security tokens. There are many subcategories, but these are the most popular ones.

#3. How can I get a crypto token?

If you’re ambitious, you can create your own crypto token. The easier option is to purchase it or mine it. In short, you can build your own blockchain or build on an existing one.