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The cryptocurrency market is growing every day, offering many opportunities for users. One of the key terms in this sphere is token. These digital assets are often mentioned in the context of blockchain, but for beginners, their meaning may not be fully understood. In this article, we will elaborate on what is called a token, their types, advantages, disadvantages and features.
What are tokens in cryptocurrency
A token is a type of digital asset created from an existing blockchain, such as Binance Smart Chain, Ethereum, Ton, Solana, and many others. Tokens represent certain values or rights and can be used for a variety of purposes, from settlement to project management.
The main characteristics of tokens are:
Decentralization. Managed by smart contracts on the blockchain.
Versatility. Can represent both financial assets and non-financial values, such as access to a service.
Distinction from cryptocurrencies. Unlike coins, tokens are created on an existing blockchain rather than requiring their own network.
Example: USDT (Tether) is a token that runs on many major blockchains.
History of tokens
The history of tokens is closely related to the development of the cryptocurrency market, the chronology can be summarized as follows:
The birth of blockchain (2009): With the emergence of Bitcoin, the first cryptocurrency was created. However, Bitcoin is a coin, not a token.
The emergence of Ethereum (2015): The launch of the Ethereum platform was a key moment for tokens, as new digital assets could be created based on this blockchain.
Token Standards (2017): ERC-20 was the first widely used token standard. It provided ease of creation and deployment of new tokens.
Rise in popularity of ICOs (2017-2018): Initial token offerings (ICOs) have become a popular way for startups to raise funds.
Difference between token and cryptocurrency
1. Blockchain
Cryptocurrency (coin): Creates its own blockchain.
Token: Is created on an existing blockchain.
2. Application
Cryptocurrency: Often acts as a medium of exchange or store of value.
Token: Can represent anything: ownership rights (share) or access to a service.
3. Creation
Cryptocurrency: Requires developing and running its own blockchain.
Token: Created using standards such as ERC-20 or BEP-20.
Is Bitcoin a token?
Bitcoin (BTC) is a cryptocurrency that operates on its own independent blockchain. It is considered the world's first cryptocurrency and serves mainly for storing value and conducting transactions.
The main differences between Bitcoin and tokens are:
Proprietary blockchain:
Bitcoin runs on its own blockchain, which was created specifically for this cryptocurrency.
Tokens in turn are created on existing blockchains.
Nature of use:
Bitcoin is a medium of exchange (analogous to digital gold) and store of value.
Tokens can represent financial assets, rights to participate in project management, utilitarian functions, and more.
Creation:
Bitcoin is mined through mining.
Tokens are created through smart contracts based on other blockchains.
Thus, Bitcoin is a cryptocurrency, not a token.
Types of tokens
1. Utility Tokens (Utility Tokens)
Used to gain access to products or services.
Example: GRT (Graph Token).
2. Security Tokens.
These are digital equivalents of traditional financial assets such as stocks.
Example: tZERO.
3. Governance Tokens.
Authorize holders to participate in project management and voting processes.
Example: UNI (Uniswap).
4. Stablecoins
Linked to the value of fiat currencies or other assets.
Example: USDT, USDC.
5. NFT (Non-Futurable Tokens).
Represent unique digital assets, such as different types of art or game mascots/items.
Examples: Milady, CryptoPunks.
Uses of tokens
1. Trading with cryptobots
A lot of tokens can be used for trading with bots, both on futures and spot markets. After registering on the Veles platform, you can create a bot with your own strategy thanks to flexible settings and wide functionality or take a ready-made bot from the catalog, which has already shown its effectiveness on major exchanges.
2. Financial transactions and payments
Micropayments: Tokens are actively used for transactions with minimal fees, for example, to pay for digital content or online services.
Payment means: Some tokens, e.g., stablecoins (USDT, USDC), are widely used for international settlement and trade.
3. Governance and Voting (Governance)
Governance tokens give holders the right to participate in various decisions regarding the development of the project. For example, Uniswap (UNI) token holders vote on protocol changes.
It is used in decentralized autonomous organizations (DAOs) where governance is collective.
4. Utilitarian functions (Utility)
Payment for services: Some projects use tokens to pay for network fees or access to platform functionality, e.g. BNB tokens on Binance.
In-game currency: In blockchain games, tokens are used to purchase items, upgrade characters or participate in in-game activities (Axie Infinity, Decentraland).
5. Investment and store of value
Exchange speculation: Tokens are bought and sold for profit.
Holding: Some tokens are purchased for long-term storage as their value may increase.
6. Granting of rights
Access to products or services: Tokens can serve as a key to access platforms, tools, or exclusive content.
Profit sharing: Some tokens provide holders with a share in the profits of a company or project.
7. Security Tokens
Digital assets backed by real financial assets such as stocks, real estate, or debt.
Used to tokenize real assets, making them easier to transfer and sell.
8. User incentivization
Projects and platforms use tokens to reward users for activity on the platform:
Participation in bounty programs.
Completing tasks within airdrops/retrops.
Incentives for liquidity in DeFi.
9. Decentralized Finance (DeFi)
Tokens are used to power DeFi applications - decentralized exchanges (DEX), lending and staking platforms.
For example, AAVE, Compound (COMP) tokens provide access to the platforms' lending functions.
10. Asset Tokenization
Tokens provide ownership of tangible or intangible assets:
Real estate (tokenization of ownership interests).
Art.
Digital assets.
11. Motivation and rewards
Loyalty programs: Tokens are used to reward users for participating in the ecosystem.
Rewards as part of liquidity mining.
12. education and certification
In education, tokens are used to validate certification of knowledge and skills.
Used to reward students for successful completion of courses.
13. Gaming industry and meta universes
Purchase of virtual real estate or items within meta-universes (The Sandbox, Decentraland).
Used as in-game currency.
14. Crowdfunding and ICOs
Projects issue tokens to raise funding at the ICO (Initial Coin Offering) or IEO (Initial Exchange Offering) stage.
Investors receive tokens in exchange for their investment.
15. Social and charitable projects
Tokens are used for transparent distribution of funds in social initiatives or charity programs.
In some platforms, tokens can symbolize participation in charity events.
16. Infrastructure functions
Enable blockchains to operate, pay for transactions, fulfill smart contracts, or store data (e.g., GAS tokens for the NEO network).
Advantages and disadvantages of tokens
Advantages:
1. Availability and ease of use
Tokens are easily transferable between users among different countries without the need for intermediaries, in the form of banks or financial institutions.
Ease of creating and launching tokens due to existing blockchains.
2. Decentralization
The operation of tokens is based on blockchains, which ensures that there is no centralized control.
Users have full control over their assets and transactions.
3. Transparency
All token transactions are recorded on the blockchain, ensuring full transparency and verifiability of all transactions.
4. Multifunctionality
Tokens provide many features and functions:
Voting participation (governance tokens).
Mutual settlements.
Payment for services or purchase of assets.
Tokenization of real assets.
5. Investment attraction tool
Tokens allow startups to attract funding through ICO, IEO or STO.
Investors get the opportunity to participate in innovative projects at an early stage.
6. Global reach
Tokens can be used worldwide, making it easier for people from different countries to access financial services.
7. Accelerated transactions
Tokens provide fast transfers without having to wait several business days like traditional banks.
8. Low fees
Token transactions typically carry lower fees compared to traditional payment systems.
9. Anonymity
Tokens provide relative anonymity for transactions, which can be important to users.
10. Security
The use of blockchain makes tokens secure against counterfeiting and fraudulent activities.
Disadvantages:
1. High volatility
The value of tokens is often subject to significant fluctuations, which can lead to both large gains and significant losses.
2. Regulatory difficulties
Many countries have not decided on token legislation, which creates uncertainty for users and companies.
Possible restrictions on the use of tokens in certain jurisdictions.
3. Fraud risks
ICOs and other token events often attract fraudsters who create fake projects to defraud investors.
4. Technical risks
Hacking and breaches of smart contracts can result in loss of funds.
Dependence on the operation of the underlying blockchain: if the blockchain is attacked or becomes inaccessible, tokens will also lose their functionality.
5. Limited liquidity
Some tokens have low liquidity, making them difficult to buy or sell.
Not all exchanges support all tokens, which limits their availability.
6. Loss of private keys
Users are fully responsible for storing private keys. Loss of keys results in complete loss of access to tokens.
7. Difficulty for novice users
Inexperienced users may find it difficult to set up wallets, interact with exchanges, or store tokens.
8. Lack of guarantees
Unlike traditional financial instruments, tokens do not have insurance guarantees, which increases the risk of asset loss.
9. Competition and oversupply
The large number of tokens on the market leads to a decrease in their individual value and competition between projects.
10. Dependence on technology
If a project ceases to exist or the blockchain becomes obsolete, tokens will lose their value.
Where to buy token
Cryptocurrency exchanges
Buying tokens is possible on popular exchanges such as Binance, Bybit, OKX, Gate.io, HTX, Bing X, Bitget, Kucoin, MEXC.
P2P platforms
Allow you to buy tokens directly from other users.
Cryptocurrency wallets
Some wallets offer built-in buying and exchanging features.
ICO, IEO, IDO
Participating in initial token offerings allows you to buy tokens before they are listed on exchanges.
Exchanges
Services like BestChange allow you to exchange fiat money for tokens.
FAQ
1. How does a token differ from a coin?
A token is created on the basis of an existing blockchain, while a coin uses its own network.
2. Why are tokens needed?
They can be used for project management, settlement, trading and other purposes.
3. What are the most popular tokens?
USDT, USDC, UNI, DAI and BNB.
4. Can I create my own token?
Yes, anyone can create their own token on popular blockchains such as Ethereum, Ton, Solana, Tron, Binance Smart Chain and many others.
5. What are the risks of investing in tokens?
The main risks are fraud, lack of regulation and high volatility.
