Knowing the token definition is fundamental for understanding crypto processes. Find out what this term means here!
What Is A Token?
A token is a digital unit of value that exists as a blockchain registry entry. Even though many people use the term “token” interchangeably with such expressions as “crypto coin” and “cryptocurrency”, they are not the same thing.
Unlike a coin that is typically native to its blockchain, tokens are built on top of it, often utilizing smart contracts to perform different functions. What’s more, they are non-minable – instead, they are created and distributed by project developers.
What You Need To Know About Tokens
Crypto tokens are developed on the basis of various standards, most of which exist on the Ethereum blockchain. Two of the most common token standards are:
- ERC-20: This standard enables users to create fungible tokens that are interchangeable and divisible.
- ERC-721: This is a standard that facilitates the creation of NFTs (non-fungible tokens). These are unique, non-divisible crypto assets that represent virtual collectibles, physical property, loans, and so on.
Token classifications differ based on the various characteristics of the units. Thus, aside from the possibility of being fungible or non-fungible, there are also other categories that tokens can fall into. For instance, when classified by functionality, a token can belong to one of the two major groups:
- Security tokens. These tokens represent financial assets, which means that their value derives from external tradable units. For instance, a company can issue tokenized shares during an Initial Coin Offering (ICO). Legally, these digital assets would be identical to conventional shares.
- Utility tokens. Such tokens provide access to a service or are used as a medium of exchange within a crypto ecosystem. They are typically distributed during crowd sales when a project executes an ICO. Utility tokens are not used as investments and can be exempted from federal laws.
Tokens can also perform other functions, including payment, governance, exchange, and beyond. Regardless of their type, tokens are stored in blockchain wallets and can usually be transferred, traded, bought, and sold similarly to cryptocurrencies.
