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Beginner's Guide to Making Sense of Cryptocurrency Tokens

While cryptocurrencies like Bitcoin have now been around for nearly eleven years, a newer, related phenomenon took off back in 2017 in the form of initial coin offerings (ICOs). This new fundraising model became extremely popular as a way for new crypto projects to raise money because it connected the project developers directly with those who wanted to get in on the ground floor. By using the decentralized, permissionless nature of cryptocurrencies, crypto projects were able to raise millions of dollars in a matter of minutes.

What is a Crypto Token?

A crypto token is an asset issued via a smart contract on a blockchain, such as Ethereum, that can represent a variety of different things. These tokens typically serve a purpose within the creators project, anything from giving discounts on the platform, to serving as actual shares in the project itself.

There are several types of tokens, although most tokens fall into two categories; utility tokens and security tokens.
Utility tokens perform some sort of function within a decentralized application such as giving discounts or rewards for holding onto the token.

Security tokens allow you to share in the success of the project, as the value of the token is in some way shape or form, tied to the success of the dApplication or project.

Can I Buy Tokens?

Many tokens are available for trade on various exchanges. If you already have some Bitcoin, then trading for some tokens should be a rather straightforward process.

Some of the more popular tokens on the market today include DAI and Chainlink – both of which can be found on the Ethereum blockchain. Binance is the most popular exchange for trading the vast majority of popular cryptocurrencies and tokens.

Tokens vs. Coins

If you’re already familiar with cryptocurrencies like Bitcoin, then you may be wondering what the difference is between these traditional crypto assets and tokens. In short, cryptocurrencies like Bitcoin act more like money or commodities, while tokens act more like traditional stocks where their value is derived from some outside utility.

A token could represent equity in a company, access to a specific decentralized application, a share in real estate, or even traditional fiat currencies. Tokens are issued on top of blockchains that are powered by the underlying, native cryptocurrencies. Tokens can be thought of sub-assets in this sense. The best example is Ethereum, where (ETH) is the core asset, and then tokens issues on the Ethereum blockchain are sub-assets.

How Ethereum Pioneered Tokens

Although Ethereum was not the first platform for issuing tokens (both Counterparty and Mastercoin predate Ethereum), the smart contracts-focused blockchain has definitely turned into the most successful offering in this space. Ethereum is now by far the most popular platform for the development of tokens, and most of this growth took place in 2017 when there was a lot of hysteria around the prospect of new crypto tokens that were seemingly being offered on the open market on a daily basis.

Network effects were a key ingredient to Ethereum’s success as a token platform. This particular blockchain made it as easy as possible for anyone to issue their own token, and crypto exchanges upgraded their backends to handle these new tokens as demand for trading them continued to grow over time. Eventually, it made more sense to launch a token on Ethereum rather than anywhere else because it made it easier to get listed on an exchange due to these developmental network effects.

What Role Do Tokens Play in Initial Coin Offerings (ICO)?

Tokens are the crypto assets that are received by participants in ICOs. Once an investor in an ICO has sent their money into a smart contract, they are then awarded with their respective share of the total token supply. Generally, the users who are sending money into these ICO smart contracts are expecting to make a return on their initial investment after the value of the newly-issued token has appreciated.

Is Bitcoin a Token?

Bitcoin is not a token. It is a cryptocurrency. The difference between Bitcoin and a token is that Bitcoin has its own blockchain where it acts as the incentive mechanism for miners on the Bitcoin network. Bitcoin is not a representation of ownership over anything, except itself. This makes Bitcoin a currency, or commodity, rather than a share, or token.

Are there Different Kinds of Tokens?

There are a seemingly endless number of different types of tokens that can be issued. There are equity tokens that represent shares in real-world companies, collectible tokens that represent ownership over some sort of digital asset (usually related to a video game), stablecoin tokens that track the value of government currencies, utility tokens that are necessary to use a particular piece of software, and even combo tokens that combine a variety of properties into a single asset.

At the end of the day, a token can represent basically anything its creator desires.

Analogy of Stock Exchange

In reality, tokenization is something that many people are already aware of in a more traditional sense. For example, traditional stocks are effectively tokens that are traded on centralized exchanges rather than issued on decentralized blockchains.

A traditional stock is basically a token that represents a share of ownership in a particular company.

Of course, it should be noted that there have been a large number of scams in the crypto token space due to the lack of consumer protections available in these decentralized systems. With a lack of regulation, it’s much easier for fraudulent claims to be made regarding what a token actually represents for its owner.

What Can Be Tokenized?

Basically any traditional asset found in the real world can be tokenized.

Currencies like the U.S. dollar and commodities like gold can already be found on the Ethereum blockchain. Artists and musicians have also tokenized their works in an effort to provide their fans with digital proofs-of-ownership. There have even been efforts to tokenize various forms of real estate in different jurisdictions around the world.

Let your imagination run wild when thinking of things in the real world that be tokenized. Anything from real estate, to electricity, is currently in the process of being tokenized. Intelligent businesses and individuals are working on ways to tokenize various real-world objects. Imagine a world where you can trade electricity as simply as you can send a text message. Or where you can own a share of every property on your block. With tokenized economies, it will be possible to own a share of your favorite artists new songs though an Initial Song Offering. We are continuing to march into a tokenized community of community ownership.

About the Author

Arthur Crowson, CryptoVantage

Arthur Crowson

Arthur Crowson is an award-winning writer and editor who hails from the Pacific Northwest. His career began in traditional news media but he transitioned to the online arena in the mid-2000s and has written extensively about the online poker boom and the rise of cryptocurrency.