In the first BTC transaction, a man purchased two pizzas for 10 000 BTC in 2010. According to Coinmarketrate.com as of 2017, the value of the same amount of Bitcoins was almost $40 million. These must have been the most delicious pizzas of all the time.
This gives us a clear idea of how cryptocurrencies have gained a name in just a decade.
Then why the idea of crypto tokens came into someone`s mind first when we got cryptos? Let’s look together for answers to all your questions about cryptocurrency tokens.
The history of crypto tokens emergence
Before looking for answers to the question “what is a cryptocurrency token”, it is necessary to understand their background. What could lead to the development of crypto tokens with existing cryptocurrencies? Early adopters of the crypt took advantage of the rise of individual cryptocurrencies such as Bitcoin. So, why are cryptocurrencies so popular? The answer to this question lies in their definition.
Cryptocurrency is the native currency of the blockchain protocol, which serves as a store of value and a medium of exchange. The main purpose of cryptocurrencies is to serve as a payment for transactions or to ensure the security of the cryptocurrency network. One of the important points underlying the sharp rise in the popularity of cryptocurrencies is their decentralized nature: no particular institution or individual controls cryptocurrencies and related rules.
Cryptocurrencies rely on blockchain technology to provide tokenized and decentralized money. Most importantly, cryptocurrencies make maximum use of blockchain technology to create alternatives in financial sectors around the world. However, they are limited by the blockchain protocol on the basis of which they are issued.
You may notice the lack of programmability as one of the notable drawbacks of popular cryptocurrencies such as Bitcoin. Therefore, cryptocurrencies have to remain within the functionality of the digital currency. It is here that you can find the basis for the development of a cryptocurrency token that can serve as something more than just a digital currency.
The basis for the creation of cryptocurrency tokens arose largely thanks to Ethereum. Launched in 2015, Ethereum has become widely used as a universal development platform for creating decentralized applications and cryptocurrency tokens. Developers have used Ethereum to create a wide range of digital tokens that can support interaction with decentralized applications. In addition, developers could use Ethereum to tokenize almost any rare asset that caught their eye. The tokenization of rare assets obviously indicates the potential of cryptocurrency tokens to make changes in a wide range of sectors.
What is a cryptocurrency token?
The most obvious question that arises in the minds of people looking for new cryptocurrency tokens is the definition of cryptocurrency tokens. What are crypto tokens and how do they differ from cryptocurrencies?
Crypto tokens are digital tokens that represent a wide range of scarce assets, including currency, real estate, gift certificates, securities and loyalty points. An important feature of cryptocurrency tokens is that they have a fixed offer or a transparent delivery schedule. Thus, concerns about cryptocurrency inflation can be avoided.
The most important thing that distinguishes a cryptocurrency token is that it is not native to the blockchain. On the contrary, cryptocurrency tokens are developed on top of the blockchain protocol, and also include management through smart contracts. For example, most cryptocurrency tokens on the Air follow the ERC-20 token standards, which define smart contracts. The token standard serves as a vital component in its operation and the value it provides. The standards define a set of rules, conditions, functions, and events that a smart contract must follow, thereby dictating how tokens work.
Another important doubt in the mind of any novice crypto-currency trader is obviously related to the value of cryptocurrency tokens. In almost every article about crypto tokens, properly explained, you will find a broad description of the overlapping aspects between them and cryptocurrencies. However, do they bring something unique?
In fact, yes! First of all, it should be noted that they are a completely different class of digital assets. They are compatible with cryptocurrencies. For example, all tokens based on the Ethereum platform have ETH inside them.
The value of cryptocurrency tokens is due to their ability to preserve value and serve as a medium of exchange. What is so special about cryptocurrency tokens if cryptocurrencies perform the same functions? Interestingly, the answer to the question indicates their ability to represent assets. Crypto tokens can represent any type of physical asset, service, or utility along with digital assets. For example, they are used to represent physical assets, such as art and real estate, in blockchain networks.
With the growth of tokenization trends, their value is gradually becoming more noticeable. As the crypto industry demonstrates promising growth rates, new cryptocurrency tokens will gradually come to the fore.
Types of cryptocurrency tokens
Cryptocurrency tokens are divided into three different categories. There are payment tokens, utility tokens and security tokens. A clear overview of the differences between different types of cryptocurrency tokens will help you learn more about the work of cryptocurrency tokens.
In most cases, security tokens face tougher regulation compared to the other two types of tokens. The main reason for stricter regulation is their investment goal. Utilitarian (useful) tokens are associated with added value in the operation of a particular product or solution. Finally, payment tokens are mainly needed to perform payment functions.
- Security tokens mainly refer to assets, such as rights to shares and debts, represented on the blockchain in the form of tokens. By their economic function, securities tokens are similar to derivative financial instruments, stocks and bonds.
- Utility tokens are usually associated with a decentralized application, and primarily serve for digital access to an application or service through a blockchain-based infrastructure. They can serve various purposes, such as user incentives, bid management, and voting rights.
The most common token standards
The basis of cryptocurrency tokens are smart contracts that regulate the rules of their exchange and functionality. In the case of a smart contract with tokens, you will find work on accounting for their ownership along with the transfer of ownership rights to them. Moreover, programmable smart contracts also allow you to add new token-related functions, such as mining and token burning. Thus, you can clearly see how smart contracts dictate the usefulness of cryptocurrency tokens.
If you are developing a decentralized application and you need a cryptographic token to do this, you must follow a certain token standard. The standard defines the main functions of cryptocurrency tokens, and here are some of the generally accepted standards currently.
- The ERC-20 token standard is perhaps the most common standard that can be found in new crypto tokens that are currently appearing. It offers basic functionality for token transfer along with approval support for spending by other third parties on the chain.
- ERC-721 has become one of the main trends in the world of cryptocurrencies, especially after the recent NFT boom. It is also known as the non-interchangeable token standard, provides functionality for tracking unique assets. All cryptocurrency tokens based on ERC-721 have individual ownership along with atomic tracking.
- The ERC-777 is another notable aspect of several positions on the list, given the advanced functionality it provides. The ERC-777 token standard helps in defining advanced functions for interacting with tokens, while ensuring backward compatibility with the ERC-20 standard.
- ERC-1155, also known as Multi Token Standard, is another interesting mention among the standards. It facilitates the prospects of managing any collection of replaceable and non-replaceable assets within a single contract. For example, the standard allows you to simultaneously transfer several variants of tokens.
The last aspect in any discussion about cryptocurrency tokens ultimately boils down to their relevance at the present time. To do this, it is necessary to look at the scale of the growth of the cryptocurrency space. DeFi and NFT solutions, along with a wide range of decentralized applications, work on cryptocurrency tokens. They can perform various functions, ranging from managing and ending with bets in recently appeared cryptocurrency-based solutions.
Crypto tokens are practically the next big thing in the cryptocurrency landscape. They can serve not only as vital tools for obtaining initial investments in new decentralized projects, but also for the development of user and developer communities. At the same time, they are an incentive for developers to improve decentralized projects with the help of additional products.
In addition, cryptocurrency tokens provide the flexibility to extend the functionality of the blockchain beyond digital currencies.
The latest impression about cryptocurrency tokens suggests that they will determine the future of cryptocurrencies, as they offer something more than just a store of value and a medium of exchange. Thanks to the capabilities of smart contracts, crypto tokens can be adapted for various decentralized applications and projects.
For example, COMP serves as a token for the crypto-lending platform Compound. The next important point in favor of the prospects of crypto tokens is the presentation of assets. You can use them to represent physical and digital assets on the blockchain network. NFT is the best example of how cryptocurrency tokens will become more relevant in the future.