Did you know that there are hundreds of thousands of tokens in circulation today? The crypto token list keeps growing, and it seems like there’s no end in sight.
Crypto tokens have transformed the world of cryptocurrency and have become a vital component of the industry. Unlike crypto coins, these tokens have evolved into utility and non-fungible tokens (NFTs) that have sold for millions of dollars. But what exactly are utility tokens, and which NFTs have commanded such astronomical prices? Furthermore, how do crypto coins differ from crypto tokens?
Our guide will provide answers to these and other questions. By delving into what crypto tokens are and how they have contributed to the growth of the crypto industry, we hope to deepen your understanding of this exciting field.
Crypto Tokens & Their History
Before the ICO craze in 2017, there were many cryptocurrencies that branched off from Bitcoin and Ethereum. However, Mastercoin was the inaugural recognized ICO and token developed by J.R. Willet and published in January 2012 via Bitcoin Forum. Willet dubbed his whitepaper “The Second Bitcoin Whitepaper.”
A crypto token is a type of cryptocurrency that operates on an existing blockchain rather than having its proprietary blockchain. Blockchains are networks of computers called nodes that verify and approve transactions, ensuring the integrity of the data stored within them. Since blockchains are decentralized, there’s no central authority governing their operation.
Tokens are distinct from coins, which are cryptocurrencies that operate on their proprietary blockchains. For example, Bitcoin is a coin that runs on its blockchain, while Ethereum is a blockchain platform that also has a native cryptocurrency, Ether. It’s important to distinguish Between tokens and coins, as they serve different purposes within the cryptocurrency ecosystem.
Type Of Tokens
Crypto tokens possess diverse functions that depend on their blockchains, ranging from DeFi (decentralized finance) features, blockchain-related cryptocurrency services, and even games. Nevertheless, all types of crypto tokens share a set of common characteristics. These include:
- Programmability: Programmability suggests that cryptocurrency tokens operate via software protocols of smart contracts that outline the features and functionalities of each token in addition to the blockchain’s rules and regulations.
- Permissionless: Crypto tokens are permissionless digital assets, meaning anyone or any entity can access them on blockchain networks without special permission.
- Created on a trustless platform: This indicates that no centralized organization or regulatory body owns or controls the blockchain upon which they are based. Instead, the blockchain’s code and intended algorithm govern how the blockchain and its tokens function.
- Transparent: Decentralized blockchains enable the transparency of crypto tokens and transactions. As a result, every exchange and transaction on the blockchain is visible to the public and can be independently verified by every computer system connected to its global network.
How Does It Work?
Crypto tokens are generated through various token standards, primarily on Ethereum’s blockchain. The expected token standards include ERC-20 and ERC-721, each with a distinct use.
ERC-20 tokens are designed for compatibility with dApps in the Ethereum network, promoting interoperability within the blockchain.
On the other hand, ERC-721 tokens facilitate the creation and operation of NFTs – unique crypto assets representing one-of-a-kind items such as art, music, videos, real estate, games, and more. The metadata associated with each NFT is unique, making it impossible to replicate or exchange with similar tokens.
ERC-20 and ERC-721 tokens are now abundant within the crypto ecosystem, numbering in the hundreds of thousands. These tokens are constantly being developed to satisfy various blockchain projects’ increasing demand and usage. As such, expect the creation of new tokens to persist and even grow in the future.
Crypto tokens continue to emerge as a popular method of raising funds for projects through ICOs. In order to entice investors, whitepapers serve as pitchbooks detailing the token’s intended use, details of its sale, the allocation of funds, and the benefits investors can expect.
How to Identify The Right Business Opportunity?
Crypto tokens are digital representations of assets or interests tokenized on an existing cryptocurrency’s blockchain. They may differ from cryptocurrencies in their intended use, as they are generally not intended as a medium of exchange or store of value.
The thing to consider while choosing tokens:
- Depending on the legal system, registration may be required. To evaluate security tokens crypto, the SEC applies the Howey Test. Currently, anything that isn’t registered is illegal.
- Ensure that the ICO’s team has a good reputation. Verify their name, address, and contact information to see if they are a real company, and then find them on the Secretary of State’s website. If a white paper and a unique website are the only places you can find information about the company, be aware of it.
- Several non-regulated exchanges outside the US list various crypto tokens. If a particular token is not listed on a regulated exchange, the probability of it being a scam is quite high.
- Sometimes even cryptocurrency tokens that are listed on a licensed exchange may be fake.
What is The Purpose of Tokens?
Cryptographic tokens are a means to conduct transactions on a blockchain while also serving as a representation of an investor’s interest in a company or serving a monetary function akin to traditional legal tender. Subsequently, token holders have the ability to utilize them for purchases or exchanges, similar to other securities, to generate profits.
Crypto tokens serve as a popular fundraising method for various projects in initial coin offerings. Unfortunately, ICOs come with high risks that have been exploited by fraudulent companies to steal money from investors. If you’re contemplating investing in crypto tokens, conduct comprehensive research on the team or company proposing them.