The miracles of technology never cease to amaze us, especially when you think of cryptocurrencies. Navigating through the clouds of doubt, hype, skepticism, and uncertainty, cryptocurrencies landed up on the pages of mainstream tech discussions. You can come across many concepts in the world of cryptocurrencies, such as a crypto token, which define a major portion of the modern crypto landscape.
In the first-ever commercial transaction with Bitcoin, an unsuspecting Bitcoin owner purchased two pizzas for 10,000 BTC in 2010. As of 2017, the value of the same number of Bitcoins stood at almost $40 million. Must have been two ‘doughiest’ pizzas of all time! That brings us a clear idea of how cryptocurrencies shot to fame within just a decade.
So, why did anyone think of crypto tokens in the first place when we had cryptocurrencies? The following post helps you find answers to all your doubts about crypto tokens. You can learn about the basic reason for introducing crypto tokens and their basic definition. Furthermore, the post would reflect on different types of crypto tokens and token standards in detail. You can get a clear overview of the factors which drive the value of crypto tokens.
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Background of Crypto Tokens
Prior to the search for answers to “what is a crypto token,” you need to understand the background of crypto tokens. What could have led to the development of crypto tokens with cryptocurrencies already available in place? Early adopters of cryptocurrencies made the most of the meteoric rise of selected cryptocurrency leaders such as Bitcoin. So, why are cryptocurrencies so popular? The answer to this question rests in the definition of cryptocurrencies.
Cryptocurrency is the native currency of a blockchain protocol and serves as a store of value and medium of exchange. The primary use of cryptocurrencies is to serve as transaction fees or ensure security of the cryptocurrency network. One of the important highlights underlying the stark growth in popularity of cryptocurrencies refers to their decentralized nature: no specific institution or individual controls cryptocurrencies and the rules associated with them.
Cryptocurrencies rely on blockchain technology for delivering tokenized and decentralized money. Most importantly, cryptocurrencies make the most of blockchain technology for creating disruption in financial sectors worldwide. However, cryptocurrencies are restricted to the blockchain protocol they are issued on.
You can notice the lack of programmability as one of the notable setbacks in popular cryptocurrencies such as Bitcoin. Therefore, cryptocurrencies have to stay within the limits of digital currency functionalities. This is where you can find the foundation for developing a cryptocurrency token, which can serve as something more than just digital currency.
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Origins of Crypto Tokens
The foundation for building a crypto token emerged largely from the origins of Ethereum. Launched in 2015, Ethereum has been growing at a massive scale as a general-purpose development platform for creating decentralized apps and crypto tokens. Developers have used Ethereum for creating a wide assortment of digital tokens, which can support interactions with decentralized applications. In addition, developers could also use Ethereum for tokenization of almost any rare asset they come across. The tokenization of scarce assets obviously pointed towards the potential of crypto tokens for introducing disruption in a broad range of sectors.
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What is a Crypto Token?
The most obvious question in the minds of people looking for new crypto tokens would be the definition of crypto tokens. What are crypto tokens, and how are they different from cryptocurrencies? Crypto tokens are digital tokens that provide representation for a wide variation of scarce assets, including currencies, real estate, gift certificates, securities, and loyalty points. The important highlight of crypto tokens is that they come with a fixed supply or a transparent supply schedule. As a result, it can avoid the concerns of inflation in the crypto tokens.
Most important of all, the basic highlight of a cryptocurrency token is that it is not native to a blockchain. On the contrary, crypto tokens are developed on top of a blockchain protocol alongside incorporating governance through smart contracts. For example, most of the crypto tokens on Ethereum follow the ERC-20 token standards, which define smart contracts. The token standard serves as a vital component in the working of a crypto token and the value it delivers. Token standards specify the set of rules, conditions, functions, and events which a smart contract must follow, thereby dictating how crypto tokens work.
Do Crypto Tokens Have Value?
Another prominent doubt in the mind of any crypto beginner would obviously point towards the value of crypto tokens. In almost every account of crypto token explained properly, you would find broad descriptions of overlapping aspects between cryptocurrencies and crypto tokens. However, do crypto tokens bring something unique to the table? As a matter of fact, yes! First of all, you need to note that crypto tokens are a completely different class of digital assets. They are compatible with cryptocurrencies. For example, all tokens based on Ethereum platform have ETH working for them internally.
The value of crypto tokens comes from their capability to hold value and serve as a medium of exchange. What is so different about crypto tokens when cryptocurrencies serve the same functions? Interestingly, the answers to “do crypto tokens have value” would point to their ability for representation of assets. Crypto tokens can represent any type of physical asset, service, or utility alongside digital assets. For example, crypto tokens have been used for representing physical assets such as art and real estate on blockchain networks.
The value of crypto tokens is gradually emerging as a prominent highlight with the rise in tokenization trends. As the crypto industry showcases promising levels of growth at stupendous rates, new crypto tokens would gradually emerge into the limelight. While crypto tokens exhibit promising value in terms of new functionality of asset representation, it is important to know what they can achieve.
Want to know the differences between cryptocurrencies and crypto tokens? Check: Cryptocurrencies vs Tokens
Types of Crypto Tokens
If you want to find the ideal choices in a crypto tokens list according to your requirements, you must know what they can do. The best way to find what crypto tokens can achieve is an outline of the variants of crypto tokens. On a broader level, crypto tokens have been classified into three distinct categories. You have payment tokens, utility tokens, and security tokens. A clear overview of the differences between the different types of crypto tokens can help you learn more about the work of crypto tokens.
In most cases, security tokens have to face heavier regulation in comparison to the other two types of tokens. The primary reason for heavier regulation of security tokens is their investment purpose. Utility tokens are associated with the added value in the functioning of a specific product or solution. Finally, payment tokens are basically useful for serving payment functions. Let us dive into a deeper impression of each type of crypto token for understanding their value in burgeoning crypto space.
- Security tokens basically refer to the assets, such as equity claims and debts, represented on a blockchain in the form of tokens. The security tokens are the same as financial derivatives, equities, and bonds in their economic function.
- Utility tokens are generally associated with a decentralized application and primarily serve digital access to an application or service through blockchain-based infrastructure. Utility tokens can serve different purposes such as incentives for users, staking governance, and voting rights.
Want to know the differences between security token and utility token? Check: Security Token vs Utility Token
Most Common Token Standards
What exactly defines how crypto tokens should function the way they are intended to? The answer points towards cryptocurrency token standards. The primary foundation of crypto tokens is smart contracts which govern the rules of their exchange and functionalities. In the case of a token smart contract, you would find the work of accounting for token holdings alongside transferring the ownership of tokens. Furthermore, programmable smart contracts also enable addition of new token-related functionalities such as minting and burning tokens. Therefore, you can clearly notice how smart contracts dictate the utility of crypto tokens.
If you are developing a decentralized application and you need a crypto token for the same, you must follow a specific token standard. The token standard guides the basic functionality of crypto tokens, and you can choose one based on your desired utility. Here are some of the commonly accepted token standards in present times.
- ERC-20 token standard is probably the most common token standard you can find in new crypto tokens emerging nowadays. The general token standard offers the basic functionality for token transfer alongside supporting approval of tokens for expenses by other on-chain third parties.
- ERC-721 standard has become one of the top trends in the crypto world, especially after the NFT boom in recent times. The ERC-721 token standard, also known as the non-fungible token standard, provides functionalities for tracking unique assets. All ERC-721 based crypto tokens have individual ownership alongside atomic tracking.
- ERC-777 token standard is another notable aspect of a few entries in a crypto tokens list, considering the advanced functionalities it introduces to the table. The ERC-777 token standard helps in defining advanced features for interaction with tokens while ensuring backward compatibility with ERC-20 standards.
- ERC-1155 token standard, also known as the Multi Token Standard, is another interesting mention among cryptocurrency token standards. The ERC-1155 token standard facilitates prospects for managing any collection of fungible and non-fungible assets in one contract. For example, the standard enables simultaneous transfer of multiple token variants.
Want to know the different types of ERC token standard? Check the list: ERC Standards
How are Crypto Tokens Relevant in Present and for the Future?
The final aspect in any discussion on crypto tokens would eventually round upon their relevance in present times. For that, you need to look at the scale of growth in the crypto space. DeFi solutions and NFTs, alongside a broad assortment of decentralized applications, run on crypto tokens. The crypto tokens can serve different functions, starting from governance to staking in the newly emerging breed of crypto-based solutions.
While many would wonder about “do crypto tokens have value,” they are practically the next big thing in the crypto landscape. Crypto tokens can not only serve as vital tools for procuring initial investments for new decentralized projects but also for fostering user and developer communities. At the same time, crypto tokens can also serve as incentives for developers to improve decentralized projects with complementary products.
Above all, crypto tokens provide the flexibility for expanding the scope of blockchain functionalities beyond digital currencies.
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The final impression regarding crypto tokens suggests that they would define the future of crypto. Developed on top of a blockchain, crypto token offers all the essential traits of cryptocurrencies. However, they offer more than just a store of value and medium of exchange. With the power of smart contracts, crypto tokens can be tailored for different decentralized applications and projects.
For example, COMP serves as the token for crypto lending platform Compound. The next important highlight in favor of future prospects of crypto tokens is asset representation. You can use crypto tokens to represent physical and digital assets on a blockchain network. Non-fungible tokens are the best examples to show how crypto tokens will become more relevant in the future. Learn more about crypto tokens in detail and uncover their potential now.
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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!