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From utility tokens to NFTs, tokens are taking center stage when it comes to blockchain technology and it may change the way companies and individuals operate in the future.
What sets tokens apart from traditional cryptocurrencies? Why are we going to see more tokens surfacing? What are the benefits of tokens and how are they used? We are here to answer all your questions, let’s get to it, shall we?
Setting Tokens & Crypto Apart
Although both can be bought, traded, and fluctuate, understanding the difference between tokens and crypto can be a little tricky, but it’s actually quite simple. Cryptocurrencies operate on their own blockchain networks like Bitcoin or Ethereum for example. When it comes to buying, selling, and trading they operate independently and require a lot of investment, maintenance, and management. Tokens, however, are free from all the responsibility of managing a network by simply using a network’s infrastructure as railways.
As many smart contracts (contracts created by groups or individuals that automatically execute specific instructions and actions within a blockchain network) were being created, tokens surfaced as a way to let these smart contracts interact.
Using the Ethereum network as an example:
- Ethereum manages its own blockchain and stores information about transactions.
- Actions taking place directly on the Ethereum network use its cryptocurrency, Ether. (ETH)
- Unlike Ether which is the official cryptocurrency of the Ethereum network, Ethereum issued tokens known as ERC20 tokens use the network’s mainframe for infrastructure.
- ERC20 tokens make it easier for companies to develop blockchain products and terms as opposed to building their own cryptocurrency.
- There are several types of tokens, and ERC20 tokens fall under the category of ‘utility token’ meaning they are transferable and can be used for payments.
Much like going into an arcade and trading your cash for tokens that serve the purpose to play and trade for prizes. In a simple manner, ERC20 tokens essentially work the same way; you can’t spend arcade tokens outside of the arcade, but the terms specify that you can spend them within the arcade or swap them for the cash equivalent in return.
Why Are We Seeing More Tokens?
As more people and businesses are hopping on the blockchain train, tokens allow their supporters and users to buy, sell, and trade value in a personalized and specific way. There are many kinds of tokens:
- Non-Fungible Tokens (NFTs)
- Governance Tokens
- Platform Tokens
- Transaction Tokens
- Security Tokens
- Utility Tokens
If you’d like more information about each of these tokens, check out this article where we go more in-depth about each one.
For now, we will focus on the two most popular tokens: Utility Tokens and NFTs.
Benefits & Uses
Utility Tokens:
A utility token serves any purpose a business or individual wants it to, allowing users to access particular services or products. Much like a smart contract, these tokens can be programmed to execute specific tasks or function in specific ways. This can be anything from applying discounts for users or accessing exclusive items or services. These tokens can be bought, swapped, spent, and transferred.
The value of utility tokens can fluctuate, but usually much less dramatically than traditional cryptocurrencies. As the quantity cap of tokens is usually lower and they are intended for transactions, they’re oftentimes less of an investment and more of a tool.
NFTs:
The most talked-about of tokens these days are NFTs. Non-Fungible Tokens are different from other tokens in that they are non-interchangeable. NFTs can be any digital file (art, music, photo) that has been minted and certified as an original piece. This piece can’t be copied and can be sold or auctioned. Once an NFT changes ownership, the owner can keep it or auction it off again.
Much like a physical piece of art in a museum such as the Mona Lisa, there is only one original. Sure! You can go into the gift shop and buy a poster or t-shirt with the painting printed on it, but it’s not the original artwork. Certified artworks like this are sold or auctioned off and change ownership, whether that be a museum or individual.
Approaching Tokens
To acquire tokens it’s easy! You can change crypto for tokens in portals known as swaps. Different swaps function for different cryptos and tokens, for example, Uniswap functions with ERC20 tokens, so make sure to do your research first. You can also simply purchase tokens in a crypto exchange.
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