Understanding Digital Assets: A Comprehensive Guide to What Are Crypto Tokens?

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If you’ve been reading about crypto and the blockchain lately, you may have encountered people talking about “crypto tokens.” What exactly are these tokens and how do they differ from cryptocurrencies like Bitcoin? Read on to find out.

Crypto Basics

Before we get into the differences between tokens and coins, you may need a quick refresher on what cryptocurrencies are. They are digital currencies that people can exchange with goods and services, similar to regular currencies like dollars and Euros. If you want to learn more about cryptocurrency, you can read our cryptocurrency explainer .

Related: What Is Cryptocurrency?

Unlike traditional money, cryptocurrencies aren’t managed by government institutions. All transactions involving particular cryptocurrencies get logged onto a centralized blockchain , a ledger that facilitates movements between secure addresses. Coins and tokens are both digital assets used to transact on the blockchain.

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Coins vs. Tokens

While the words “coin” and “token” are often used interchangeably, they are distinct types of assets. The most significant difference between a coin and a token is where they operate. Coins are units that are native to the blockchain they’re built on. For example, Ethereum is native to the Ethereum blockchain, whereas Bitcoin was made for the Bitcoin blockchain. These coins use “keys” to signify ownership of some amount of cryptocurrency.

Coins are frequently used in everyday transactions, like online shopping or sending someone cash. If someone sends you bitcoin, the blockchain facilitates an entry to increase your wallet and reduce the other person’s balance, completing the transaction.

On the other hand, tokens are not native to the blockchain they’re operating on. For example, many of today’s most widely used crypto tokens are run and exchanged on the Ethereum blockchain. Examples include Tether, which is intended to mirror the value of the US dollar, and Uniswap, a protocol used to trade different cryptocurrencies.

How Do Crypto Tokens Work?

Crypto coins are comparable to the money you have in a bank account. While you own that amount, the money is not tied to any particular dollar bill or coin. It’s when you withdraw from your account that you get a tangible representation of that value. On the other hand, tokens are “owned,” and each is an individual asset that you own. For example, game tokens at arcades each represent a claim to play a game.

If you send someone a token, it “leaves” your account and moves to another person’s account. This is why tokens can also signify ownership or facilitate exchanges in property, such as with “non-fungible” tokens. With NFTs , each token is like a “deed” that represents your claim to a particular piece of art or digital artifact.

Unlike coins, which use a system of public and private keys to facilitate transactions, exchanges made with tokens use a system called “smart contracts .” These blockchain applications can be programmed to perform trades or transfers when certain conditions are met. Each blockchain that serves as a platform for tokens has a technical standard for defining a smart contract. For example, Ethereum uses one called ERC-20.

Where Can You Get Them?

A common way to get crypto tokens is through cryptocurrency exchanges . These are large-scale platforms that facilitate trades across a wide array of different coins and tokens. These will allow you to trade between different cryptocurrencies and regular currencies, manage various wallets, check the value of each crypto, and facilitate the process of sending and receiving currency.

Some tokens get issued through other applications. For example, some newer mobile apps give crypto tokens to people that actively use their service. These often facilitate transactions between users and make in-app purchases.

Sometimes, tokens represent something else you’ve paid for. An example of this is a “security token.” These are assets that signify your ownership of part of a company. A security token essentially replaces share or stock certificates, an official document that shows how much of a corporation someone owns.

What’s a “Non-Fungible” Token?

Some of the most popular types of tokens are “non-fungible tokens,” or NFTs . They are “non-fungible” because they are not interchangeable with each other. Each token represents ownership of a particular asset, such as art, digital property, or the rights to a specific physical item.

During its peak in popularity, many strange things were sold as an NFT. For example, in March of 2021, Twitter founder Jack Dorsey sold his first tweet as an NFT in a digital auction. Other people have sold JPEG image files, game items, and paintings.

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Understanding Digital Assets: A Comprehensive Guide to What Are Crypto Tokens?