What is the difference between traditional cryptocurrencies and tokens?
Simply, when applied to buying, selling and trading, a cryptocurrency operates independently on its own blockchains such as Bitcoin and Ethereum. A token simply uses a coin’s network as infrastructure instead of creating, managing, and maintaining its own blockchain.
How tokens are used:
When a token is created it does not directly operate on its own blockchain, instead, it runs on a pre-established blockchain. For consistency purposes, we will use the Ethereum network as an example – tokens supported by Ethereum are known as ERC20 tokens and they use the Ethereum blockchain technology for infrastructure. An example of an ERC20 token in use is the Basic Attention Token which backs Brave Browser – a system that rewards with tokens by replacing the usual web ads with ads of their partners. By creating a token, Brave Browser can now rely on the Ethereum network through its own ERC20 Basic Attention Token and incentivize its users with token-based rewards.
So why use ERC20 tokens instead of Ether directly? ERC20 tokens are issued on the Ethereum blockchain, and transactions on the Ethereum network require Ether. These tokens are used for creating smart contracts on the Ethereum blockchain and can be used to make tokenized assets that people can invest in. This means token holders can make specific purchases or trade tokens to make a profit. Ethereum runs on its own blockchain that stores value and validates transactions and ERC20 tokens use the Ethereum blockchain as their backbone. This allows businesses, services, and people to create personalized tokens without the need to create a mainframe.
Types of tokens:
Now that it’s been established how tokens can be used, let’s discuss the different types of tokens.
- Non-Fungible Tokens (NFTs) represent a specific underlying asset- such as digital artwork- and are immutable, meaning they are irreplaceable – much like an original art piece in a museum. Unlike NFTs, a fungible token is interchangeable.
- Platform Tokens support decentralized applications built on a blockchain. For example, BNB (Binance Coin) is a token that is used primarily to pay transaction and trading fees on the Binance exchange.
- Security Tokens are minted to represent ownership of another asset. Let’s say you want to buy gold but you don’t want to buy the physical asset – in theory, someone could create a token that is tied to the price of gold – instead of owning gold, now you own a representation of gold.
- Transaction Tokens are used as a fast and easy way to transfer money. A good reference for this type of token is XDai which is pegged to USD and is easily used to pay for simple goods or send funds represented by tokens around the world.
- Utility Tokens have a value tied to their ownership. Looking back at the Basic Attention Token which is used to reward creators and users for browsing content on the Brave Browser. As the name indicates, they can be utilized for commercial intent, unlike security tokens, which are bought to hold.
- Governance Tokens allow holders to vote on certain things. This gives users of the token decision-making rights by casting votes – the more tokens, the more voting power. For example, Uniswap is governed by a decentralized community of UNI token holders and their delegates who vote on upgrades and other actions.
Traditional cryptocurrencies are a world of their own, and tokens use their structure and value to represent new pathways for buying, selling, and trading digital currencies – giving those arcade days a run for their money.
All in all, tokens are a great way for individuals and institutions to create a personalized way for users to buy, sell and trade without the responsibility of managing a blockchain network. For more information on all things crypto, feel free to check out our other articles. If you wish to start taking crypto payments for your business do no hesitate in contacting ForumPay today.