What Are Tokens in Cryptocurrency: A Complete Introduction

By 

Marcel Deer

 on May 30, 2022. 
Reviewed by 

Romi Hector

A graph with a rising trend and floating cryptocurrency coins with a gold background

If you're new to the world of cryptocurrency, you may be wondering what tokens are. Tokens are a key part of the crypto ecosystem, and they have a variety of uses. This article will give you a complete introduction to tokens in cryptocurrency, how they work, and how they differ from coins. Let's begin!

What Are Tokens in Cryptocurrency?

In the most basic sense, a token is a digital asset used in blockchain-based applications. For example, all crypto assets could technically be loosely described as tokens. However, we'll look into a more accurate description of tokens and their role within a cryptocurrency network.

Tokens represent some kind of value and can be used to pay for goods and services or to participate in decentralized applications (dApps). Tokens also represent tradable, fungible assets (like fiat currency) and are typically used in fundraising for crowd sales.

Usually, the word "token" refers to cryptocurrency other than Bitcoin and Ethereum. To understand why this is so, it's important to scale back a bit and look at the history of Bitcoin.

Bitcoin was the first cryptocurrency. Launched in 2009 by pseudonymous creator Satoshi Nakamoto, the technology behind Bitcoin—blockchain technology—revolutionized the finance and technology industries forever.

Since then, more and more projects have sought to build their own iterations of Bitcoin or blockchains. Bitcoin is open-source, which means that its design is public and can be freely used by other developers.

Ethereum is one such blockchain. The main difference between Ethereum and Bitcoin is that Ethereum can accommodate complex applications being built on top of its blockchain. Technically, you can also build on top of Bitcoin's blockchain, but it cannot support the level of complexity that most Ethereum-based dApps have.

So, where do tokens come in? Simply put, the native cryptocurrencies of networks built on top of other blockchains (such as Ethereum) are called tokens. While those having their own blockchains are called coins, those that do not are called tokens.

We'll discuss the differences between tokens and coins later, so keep reading.

How Do Crypto Tokens Work?

Programmable blockchains like Ethereum have paved the way for developers to build projects and create cryptocurrency without building a blockchain from scratch. As discussed, cryptos that are native to these networks are called tokens, but how exactly do they work?

Tokens are pretty flexible in terms of use. They are cryptocurrency assets with value and can be bought, sold, traded, transferred, and stored. As such, these processes occur on whichever blockchain the token uses. Tokens have so many uses that they can be considered one of the key features of DeFi.

For example, tokens built on Ethereum are ERC-20 tokens, or Ethereum-compatible tokens, which means that the Ethereum blockchain will carry out all the transactions for that token. Note that while they are called ERC-20 tokens, they can have different names. Some of the most popular ERC-20 tokens are Shiba Inu, Tether, Chainlink, and Maker.

Tokens have a variety of uses aside from being used as currency or means of payment. Here are some of the most common ones:

  • Governance Governance tokens afford their holders the right to vote on the direction of a project. The more tokens a person has, the more weight their vote carries.
  • Decentralized finance (DeFi) projects DeFi refers to the shift from traditional, centralized financial products to decentralized ones built on blockchain technology. These projects often issue their own DeFi tokens to be used in their protocols.
  • Non-fungible tokens (NFTs) NFTs represent a unique asset. Unlike other crypto assets, NFTs cannot be replaced by another token—each one is unique. NFTs represent ownership of digital assets like artworks, videos, characters, music, digital items, and more.

Now that we know what tokens are and how they work, let's discuss the differences between coins and tokens.

Crypto Tokens vs. Coins

As mentioned, the main difference between coins and tokens is that coins have their own blockchain, while tokens use another blockchain. Bitcoin and Ethereum, for example, are coins because they each have their own blockchain. Also, while most coins are typically used as currency, tokens tend to have a wider range of functions, such as those discussed above.

Some of the top crypto tokens in the market today are Tether, Shiba Inu, Chainlink, and Uniswap.

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