Cryptocurrency tokens explained - how are they different from coins?
Many people are familiar with the fact that there are both crypto coins and tokens, but you may not know what the difference is. In this article, we’ll be explaining the difference between these two types of investments.
What are tokens? How do you use them? We’re going to cover all of that and more in this article, including giving you some examples and real-world use cases for cryptocurrency tokens.
What is crypto token?
A token is a cryptocurrency that is issued as a sub-asset of another cryptocurrency like Ethereum, Neo or Waves. While coins normally are used as a currency for exchanging value, tokens are different. They are normally used as a utility asset for other purposes like asset management, tracking and data storage and other uses.
How do cryptocurrency tokens work?
Tokens represent some type of value that now becomes tradable. Users who invest in these assets are doing so to have the rights to something such as voting, loyalty points, rewards, etc. They are created using another cryptocurrency as a foundation.
In some cases, tokens are used purely for crowdfunding, and then those tokens will be swapped for assets on the new blockchain. However, some projects will stay with the original chain forever.
Cryptocurrency token use cases
There are many different use cases for cryptocurrency tokens. In fact, this technology can be applied to nearly every industry. Tokens such as VeChain and WaBi are developing supply management systems.
Stable tokens like Dai make it easier to do business and to store money in cryptocurrency without losing value, and allowing people to take out equity loans against their own investments.
How do you create crypto token?
The most popular way to create a cryptocurrency token is to build it on the ERC20 standard. This is Ethereum’s base layer for creating tokens. It takes a lot of the work out of making your own crypto token, and that makes it an excellent choice for crowdfunding operations. The Ethereum Foundation even provides step by step instructions for doing it.
Token types and examples
A security token is one that is more of an investment in a company. These assets must follow strict SEC rules, and would normally belong to financial organizations like Polymath.
A utility token is one that sort of skirts the SEC laws because it’s not intended to be an investment. Utility tokens are for, well, utility. They are often related to storage or other capabilities which are housed on the blockchain such as filecoin, a blockchain based data storage network.
Payment tokens. While coins are the most popular for payments, there are tokens that serve this purpose as well! Dai, for example, is a stable token created using Ethereum. It can be used for payments and for holding currency that will not to go up or down in value.
Crypto tokens versus coins
Tokens are normally purchased and coins are normally mined. A token is typically created as an offshoot of another cryptocurrency, like Ethereum, while coins run on their own chains. Coins also tend to be community backed projects, while many tokens are more corporate in nature.
Tokens also tend to have more utility than a coin, because they’re used for much more than just a currency, but instead, fuel entire ecosystems of other blockchain based products. These rules are of course not hard and fast, but they will apply to most assets you come across.
How do you trade cryptocurrency tokens?
Tokens trade pretty much the same way that coins do. You’ll need to find an exchange with an active listing for the asset that you want to trade, and then move your tokens there. To find the right exchange, visit the project’s website. Normally they will be listed there.
When transferring Ethereum based tokens, it’s important to remember that you will need gas to send them. This means you’ll need at least a little Ethereum in the same wallet.
How do you store tokens?
An overwhelming majority of tokens are ERC20 based, and that means that you’ll need an Ethereum wallet to store them. However, there are other base chains for these tokens like Waves or Neo, and if that is the case for your token, then you’ll need to find a compatible wallet to store them. Refer to the project’s website to find the right wallet.
The good news for these tokens is that once you find a wallet, it can store any assets you would want to invest in. This is because they are actually stored on the base currency’s address.
What are crypto token swaps?
A token swap happens when there will be a change for the underlying token. When this happens the development team will inform users ahead of time, and then they will be told where to send their tokens for a swap. After they send their currency, the new asset will be returned to their wallet.
In some cases, this will happen due to a problem which has come about and needs a new system to be fixed, but token swaps are also common for projects launched on Ethereum who will be moving to their own chains after crowdfunding finishes.
Token swaps are limited time events, so if you believe that your investment could go through a swap you should keep tabs on the project through social media. This will make sure that you don’t miss anything and lose your investment by holding now worthless tokens.
What are token burns?
A token burn is a scheduled event by the team behind a cryptocurrency. This is typically done to control the supply of the token if there are too many of them. In some cases, this is planned from the currency’s creation.
However, in other cases, this decision can be made later if it turns out that there is a problem or concerns are raised by the development team. Since a token burn lessens the supply of the asset, in most cases the value will rise to compensate.