What Is A Token?
Token is just another word used for ‘cryptocurrencies’ or ‘crypto assets’. A token is often used to describe all other cryptocurrencies except Ethereum and Bitcoin because these are the two biggest cryptocurrencies.
So this is used for all the other coins besides the two mentioned above, even though they are technically tokens as well. The word ‘token’ also has another meaning. This one is used for all the crypto assets that run on top of another cryptocurrency’s blockchain.
Crypto tokens can be defined as a type of virtual currency or a denomination of a cryptocurrency. Cryptocurrency tokens can be used to represent a token holder’s share in a company or they can be used for other economic purposes.
Token holders can also use these tokens to make purchases or trade just like other types of securities in order to make a profit.
The difference between crypto coins and crypto tokens is that the former allows users to make payments using the digital currency. However, tokens perform a wider range of functions including trading, etc.
Importance of Tokens
Token is an important terminology in the crypto world and hence, it is essential to understand its meaning and importance. Apart from the definitions given above, the following are some cryptoassets that have the word token in their name. Let us take a look at them:
1. DeFi Tokens
DeFi applications operate without any regulation by a central bank or authority. Through DeFi lending, one can simply earn interest by lending out money just like a traditional bank does in the case of flat currencies.
2. Governance Tokens
These are a special type of DeFi tokens as they allow the token holder to have a say in the future of a protocol or app. Since these are decentralised, they are not controlled by any other central authority. With the help of these governance tokens, token holders can vote on the decisions pertaining to the DeFi protocol.
For example, the popular savings protocol Compound issues a token called COMP to its holders. This gives them a power to determine how Compound is upgraded by voting for it. This means that the more COMP tokens you hold, the more votes you get.
3. Non-fungible Tokens
Non-fungible tokens are used to represent the ownership of those digital assets which are unique in nature. It certifies that the digital asset is unique and not interchangeable. They are gaining importance these days because they make it difficult for digital creations to be copied and shared.
Nobody can modify the record of the ownership of a digital creation or copy a new NFT. This helps creators to claim ownership rights over their own work. It is being increasingly used in the case of digital artworks, an in-game item, essays, a digital collectible, a domain name, a ticket for an event or coupon, etc.
4. Security Tokens
A special type of cryptocurrency, that is, security tokens are being used increasingly these days. These claim to be the new equivalent of traditional securities like stocks and bonds, in the cryptocurrency world.
They are essentially digital, liquid contracts for fractions of any asset such as real estate, cars, corporate stocks, etc, which has some value in real life.
Security tokens ensure that an owner’s stake in the blockchain is preserved. Their main use is to sell shares in a company, just like the shares sold through conventional markets, without the need of any broker.
Written By - Himanshi Nebhnani
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