If you keep yourselves updated with the day-to-day world, then surely you might have come across this trending term. So let's set out to see what exactly do you need to know about ‘tokens’!
digital assets built on a particular blockchain network
What is a ‘token’?
For a layperson, getting confused between ‘token’ and ‘cryptocurrency’ is very common and often, you might have heard people say, “oh cryptocurrency and token are the same only” (beware of them as they are the same who believe that pineapple on pizza is a good combination). Hitherto, the term ‘token’ was used for all types of assets. However, now the way you understand the meaning of ‘token’ depends on the context.
The first connotation (also the more specific one) is attached to those units of value that work by getting attached on top of existing blockchain networks of cryptocurrencies. Another idea is that tokens constitute all cryptocurrencies except for Bitcoin and Ethereum.
If ‘xyz’ is the cryptocurrency native to the ‘xyz’ blockchain, there might also be several other ‘tokens’ that are built on the same blockchain.
In short, they represent an asset (physical or digital) and are used for various purposes like investment, trade, fundraising, etc. as a digital store of value.
After reading the above text, you must be wondering, that is fine but do I even need tokens, or how is a virtual thing so relevant that people are going bonkers about it? Well, let's try to understand why they are the centre of attention (like the popular rich kids of your class?)
Firstly, as you might have already read, tokens hold monetary value, so they are used for transactions and purchases, investments, etc. They are an indicator of your share in digital or non-digital assets. Any asset can be traded, without a third party, which creates a frictionless trading and marketing platform (tokenization). So, tokens create a secure and active trading ecosystem. Tokenization helps fresh business models by eliminating the need for middlemen (you know, the 'cutting out the middleman' thing?)
They are also attached to the rights and obligations through a contract between parties involved in a transaction. Aside from that, one of the main advantages is that they can be built on an existing blockchain, making the process affordable and less complicated.
Types of tokens
The word ‘fungible’ literally means something that is exchanged. So, fungible tokens represent assets on any blockchain that allows interchanging. They are not unique and are divisible. They also do not store any data with themselves and just act as a store of value and a mode of payment, like Solana.
For instance, a $10 note is exchangable with another $10 note but a Van Gogh painting is not exchangable with a local artist’s painting. This is because the former is fungible while the latter, is not.
Non-fungible tokens (NFTs) represent the ownership of an asset that exists in the real world like art, videos, etc. (we don’t believe that this term is new to you)
The feature to be noted about NFTs is that they lack a standard value which doesn’t allow you to exchange one NFT for another. If I use a technical way of explaining this, then, it can be said that NFTs are data added to a file (image, file, video, etc.) which have a unique signature acting as a code to protect from its duplicates, if any. In other words, the ownership of any asset through NFTs is recorded on a blockchain and no one can modify it.
Today, thousands of NFTs are sold which can range between $200 to millions of dollars. The artists, especially the digital artists have found new patrons with the coming of NFTs (just one instance though).
This being said, using NFTs are in themselves quite a task and you will be learning in detail about them very soon. Stay tuned!
Again, first the term will be explained in a slightly complicated manner, okay? Basically, wrapped tokens refer to a secured or ‘locked’ counterpart of the original asset as a smart contract.
Confused? How can a token be ‘wrapped’? (wrapped like a burrito? 🌯) It is so called because they are put inside a ‘wrapper’ in the form of a safe digital vault. It is the tokenized version of another cryptocurrency and is attached to the value of the asset it is a representative of. In this case it is not necessary that the asset for which it is issued lives on the same blockchain as the token (its unique feature).
Some examples include Wrapped Bitcoin (WBTC), Wrapped Ether (WETH), etc.
Tokens vs. Cryptocurrencies
Coming to one of the most anticipated points of our discussion- how different are cryptocurrencies and tokens from each other? Often, people tend to get confused and mistakenly use the two words interchangeably due to lack of proper research on their part.
So, c’mon let's look at the similarities and differences between the two together.
It can, however, be suggested that even though the two have different meanings, they can be understood to be closely related (why does this sound dramatic like a movie line?).
Basically, both are indispensable components of the decentralised web3 space and the major difference between them is their connection with the blockchain- while one is native to a blockchain, the other is built on top of a blockchain that is not its own. It’s as simple as that!
Built on top of an existing blockchain
Native asset of a blockchain network
Medium of Exchange
Medium of exchange
Thousands of tokens can be built on a single blockchain
A blockchain can have only one native asset
Provides utility, security, and governance
Perform governance and transactional functions
Stores value (intrinsic value being higher due to being native)
What’s the standard that token protocols need to maintain?
Basically, token protocols are a set of rules that allow one to develop these tokens on a blockchain and guide how tokens function. They are application-level guidelines which allow smart contracts to perform their function. Anyone who gains a certain level of their knowledge can create an Ethereum Request Comment (ERC) token of their own.
Now what exactly are these ERCs? Well, they can be understood to be a set of technical documents that lay down the definition for specific token types on the blockchain (like a manual for an electronic item which explains the various functionaries).
Some of the most popular token standards are ERC-20 (allows functionality to transfer and approve of tokens), ERC-721 (NFT standard), Solana Programme Library (SPL) (facilitating transactions in the Solana ecosystem), etc.
Hold on just a little for this!
The importance of these tokens is increasing day-by-day as ownership and decentralisation also assume significance gradually. Is it possible that in a few years’ time, these tokens and coins- which surely hold monetary value- become one of the major forms of exchange? Maybe (actually most probably) because all your favourite celebs are rushing to utilise NFTs and what not. But seriously, that day might not be THAT far, right? Maybe you will be one of the owners of these assets in the coming days.
However, an important thing to be kept in mind before investing into these assets is to do proper research and consult experts in this field!!!
Now that you know the basics of tokens, you can stop fearing yet another ‘technical’ term and get yourselves ready for the next level- ‘decentralised apps’.