A crypto token is arguably the most fundamental element of digital currency. in this article, we’ll explain exactly why.
What is it?
The most basic definition of a crypto token is that it represents a specific fungible and tradable asset or utility.
For those who are unaware of what “fungible” means, it is the standard ability of a good/asset to be interchangeable with an array of other individual goods/assets of the same type. Can the token be bought, sold and traded for other assets like the Euro or another token?
Fungible means the assets that are exchangeable for one another. Moreover, digital tokens may better simplify the exchange and trade processes because fungibility generally implies equal value between the assets.
Quick overview of blockchain
The asset or utility that a crypto token represents can often be found on a blockchain. You may already know what a blockchain is, but for the sake of providing context, let’s briefly go over what exactly it is.
Blockchain is the cryptographic ledger technology that connects with virtual currency. It is essentially a list of records (the ‘blocks’) that are linked together on a public database (the ‘chain’). The blocks existing on this digital chain are full of various pieces of information. There are three parts, to be specific:
- The blocks store information surrounding the transactions. This includes the date, the time, and the dollar amount of your most recent purchase.
- They store the information regarding the participants in the transactions. Rather than using your actual name, your purchase is put on record without any form of identifying information. It instead uses something called a ‘digital signature’ that basically functions as a username.
- They store any information that distinguishes them from other blocks. Each and every block stores a unique code called a ‘hash’ that allows us to tell it apart from other blocks. A hash is a function that converts an input of letters and numbers into an output of a set length. Despite the details of your new transaction looking near identical to your earlier purchase, it is easier to tell it apart from other blocks. This is all thanks to their unique codes.
A single block on the blockchain is able to store up to 1 MB of data. Depending on the size of the transactions, that means a single block can easily house a few thousand transactions under one roof. Furthermore, every time the blockchain receives a new block, it effectively becomes publicly available for anyone to view.
If you’re familiar with the world of virtual currency, then you might be somewhat aware of terms such as token, altcoin, and cryptocurrency being clumsily mistaken for being interchangeable. Contrary to what people think, these are all different terms with their own brand of significance. Cryptocurrency is the superset, while altcoins and crypto tokens are the two subset categories that connect to it.
A cryptocurrency is a digital form of currency that utilizes cryptography for a security. Because of the security feature, it is generally very difficult to counterfeit. A conventional cryptocurrency is a currency that is primarily a system whose sole purpose is either making or receiving payments on the blockchain.
You needn’t look too far for an example, as the most well-known cryptocurrency is Bitcoin. Nowadays, there are a lot of working cryptocurrencies with various functions or specifications. Some of them are clones of Bitcoin, while others are simply variants of Bitcoin.
Altcoins are basically the alternative cryptocurrencies that were set out into the world following the success of Bitcoin. For the most part, they consider themselves to be a better substitute for the aforementioned cryptocurrency. The term ‘altcoin’ literally translates to ‘alternative coins’; specifically, they are coins that are surrogates for bitcoins.
Investopedia editor, Jake Frankenfield, states that:
“Many altcoins are trying to target any perceived limitations that Bitcoin has and come up with newer versions with competitive advantages. As the term ‘altcoins’ means all cryptocurrencies which are not Bitcoin, there are hundreds of altcoins.”
Common examples of altcoins include Litecoin, Bitcoin Cash, Namecoin, and Dogecoin. They have each reached a varying level of success. However, none of them have garnered the same level of popularity as Bitcoin.
More on tokens
Crypto tokens are a special brand of virtual currency tokens. They reside on their own blockchains and, as previously mentioned, represent an asset or utility. For example, someone can have a crypto token that represents a specific number of customer loyalty points within a blockchain. In a way, these are tools that manage such details pertaining to a retail chain.
There can usually be another crypto token that provides entitlement to the token holder. This entitlement is to view roughly 10 hours of streaming content on a blockchain that shares videos.
A separate crypto token can even represent another cryptocurrency as one such token equates to 20 bitcoins on a particular blockchain. Such tokens are tradable and transferable among the participants of the chain.
These kinds of crypto tokens often serve as the transaction units on the blockchains that come into existence by using the standard templates. This includes that of the Ethereum network, which allows a user to create their own tokens. Such blockchains function on the concept of smart contracts or decentralized applications, wherein the programmable and self-executing code processes and maintain the various transactions that take place on the blockchain.
Essentially, cryptocurrencies and altcoins are specific virtual forms of currency that possess their own respective blockchains. Moreover, they often function as a medium for digital payments. On the other end of the spectrum, crypto tokens operate on top of a blockchain. This chain serves as a medium for the creation and eventual execution of decentralized apps and smart contracts. The tokens themselves are tools for the facilitation of the transactions.
Such crypto tokens are typically created, distributed, sold, and then circulated through a process called Initial Coin Offering (ICO). This procedure generally involves a specific type of crowdfunding in order to fund the development of a project.
Crypto tokens themselves do not have as much of an extensive explanation as other virtual currency terms, but they are a vital piece of this technology nonetheless. Put simply, the system would cease to be without them.