How Cryptocurrency Tokens are Different from Coins

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gingerbreadfork
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5 min read

Tokens have become a frequent topic in the cryptocurrency world, but what makes them different to other forms of cryptocurrency?

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Tokens have become a staple of the cryptocurrency ecosystem, but what makes them different? If you’ve been considering digging into tokens, it pays to know how they differ from some other types of cryptocurrencies. Find out why tokens aren’t just coins, and how they leverage existing networks to create simple solutions to sometimes powerful problems.

What is a Crypto Token?

The term token in cryptocurrency most commonly references a type of digital asset that operates on top of an existing cryptocurrency network. Although the most well-known example of a network with many tokens is Ethereum, many other networks support tokens in various ways.

What is the Difference Between a Crypto Coin and a Token?

The best way to decipher between a coin and a token is to look at the network it uses and how it is sent. Is the crypto one that operates on its own network? Is the crypto one that has its own block explorers and wallets? If the answer to questions like these is yes, it is likely a coin. If crypto leverages an existing network, you can almost always consider it to be a token.

How to Create a Crypto Token

Creating new tokens varies depending on the network used. In the case of ethereum based tokens, you would first create a suitable smart contract and deploy this to the network in the form of a transaction. In many cases, simple tokens may use existing contracts with some minor tweaks to name, the supply, and other simple variables. Complete custom smart contracts can be developed in more advanced token use cases to enable the token to be used in specialized ways.

Suppose you are looking to create a token. In that case, there are typically many developer resources on the official websites and generally many community resources for popular projects that can help get you started on your journey. How difficult it is to create a token will depend on the network and your specific use case. If you are creating a very basic Ethereum token to experiment with, there are many guides for creating tokens on an Ethereum testnet which is an excellent place to get started experimenting.

How Does a Crypto Token have Value?

Market prices for tokens and any other type of cryptocurrency come about through price discovery. While this can be a dense topic, it primarily comes down to what people are willing to pay and how actively it is being traded.

Cryptocurrencies, whether they are coins or tokens, can essentially be considered speculative assets; this makes concepts like supply and demand strongly influence a token having value.

Token value can be very unpredictable, especially for brand new token projects. Many established cryptocurrencies that have existed for several years still face quite significant volatility, and this is always something to be aware of when you are dabbling in token speculation yourself.

How to use a Crypto Token

The fundamental thing to be concerned about when using a token is ensuring you are able to send and receive it. As both of these things require a compatible wallet, you should first look to find a reputable and compatible wallet.

Many tokens require network fees to be paid in the base network token when performing transactions. For example, if you want to send an Ethereum token like DAI, you need some ether to pay for the gas to complete the transaction. So if you plan to send your tokens, this is something you may wish to do a little research on. While some centralized exchanges will accept withdrawal fees in the tokens themselves, this is generally not the case with a non-custodial wallet where you control the private keys and perform the transactions yourself, or the platform is merely broadcasting them instead of using a fully managed custodial wallet on an exchange.

What is a Crypto Utility Token?

Utility tokens are a term you hear thrown around regarding tokens, and while this may sound confusing, the core concept is relatively easy to get a handle on. A utility token is a token designed to provide some form of utility, often giving token holders access to a product or service.

For example, a crypto project that is focused on decentralized storage may only enable users to pay for storage in the native token. However, this is just one example of how a utility token could operate. Often this term is used pretty broadly, so it's best to dig into the tokenomics of a project to understand best the utility a token may provide or intend to provide in the future.

What are Governance Tokens?

Many projects are starting to explore decentralized governance in the crypto space. Due to this, many governance tokens have begun to appear. What exactly each of these tokens does varies from project to project, but in general, the goals tend to be in helping direct a project or decide on important variables during the life of the project.

An example of a governance token is Maker (MKR); this token is used to help keep the DAI stablecoin project healthy by allowing MKR holders to vote on important issues or for new changes.

What are Non-Fungible Tokens (NFTs)?

Non-fungible tokens are unique in some way, which sets them apart from other types of crypto tokens. NFTs could be tokens that represent in-game items or even a piece of art. In recent times NFTs have been incredibly popular, with even larger companies from traditional markets start to get in on the game, releasing their own packs of custom NFTs.

Suppose you are wondering how cryptocurrency could influence how content creators exchange value or even how ownership of traditional assets could be tracked in the future. In that case, NFTs are an excellent topic to spend a little time learning about. Examples of Crypto Tokens

  • Tether (USDT)
  • 0x (ZRX)
  • Chainlink (LINK)
  • USD Coin (USDC)
  • Aave (AAVE)
  • Star Atlas (ATLAS)

Crypto Projects Don't Always Need a Blockchain

Blockchains, especially those that rely on expensive proof-of-work (PoW) algorithms to secure them, require a lot of support. New projects that operate on a PoW blockchain can really struggle to keep the network secure and active which can take away from building out other parts of the project. For many projects, it makes little sense to try and struggle with these things or to attempt to reinvent the metaphorical wheel where there are large established blockchains that support tokens that remove these barriers.

How to Buy Crypto Tokens?

Tokens have grown to be a staple of the crypto space. As a result of all the interest in tokens, an extensive range of platforms have popped up to allow you to trade them, and you can even trade a range of popular ERC-20 tokens like DAI, USDT, USDC, and more on LocalCoinSwap.

When wanting to trade crypto-to-crypto, there's a range of decentralized exchanges (DEXs) that support trading tokens; Uniswap is a popular choice for these types of trades, to name just one.

Cryptocurrency Tokens in the Future

If you're getting active in any part of the cryptocurrency ecosystem, you'll likely come across more than a few tokens in your journey. Between tokenized assets, NFTs, and decentralized finance, there's so much to explore. Furthermore, with cryptocurrency evolving rapidly, there's no telling where tokens could start popping up in various aspects of your life over time as they continue to expand from what was once merely a niche curiosity to something that is a big part of the blockchain revolution.

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