What is a crypto token?
A crypto token is a cryptocurrency that isn't built on its own blockchain. All cryptocurrencies exist on a blockchain, which is a platform that stores data in a way that makes it nearly impossible to change, falsify, or replicate. In simple terms, a blockchain is a global network of computers called nodes. These nodes verify and approve all transactions on a blockchain, which are publicly available for all to see. Blockchains are decentralized, meaning there’s no central authority like a bank or a government to oversee its activities.
Any cryptocurrency that doesn't have its own blockchain is known as a token. All crypto tokens and crypto coins exist on their respective blockchains. However, both have different uses and purposes, so it’s important not to confuse them.
For example, Bitcoin (BTC) is a crypto coin because it has its own blockchain, called the Bitcoin blockchain. Ethereum (ETH) is another blockchain with its own native cryptocurrency, ether.
How do crypto tokens work?
Crypto tokens are created using various token standards, most of which exist on Ethereum's blockchain. Some of the most common token standards are ERC-20 and ERC-721; both serve different purposes.
The ERC-20 token allows users to create tokens compatible with dApps (decentralized applications) on the Ethereum network, facilitating interoperability within the blockchain.
Meanwhile, ERC-721 enables the creation and operation of NFTs (non-fungible tokens), which are unique crypto assets that represent items like art, music, videos, real estate, games, and more. Each NFT is unique in its distinctive metadata, which means an NFT can't be replicated or swapped with other tokens that might be similar in appearance or functionality. We’ll discuss NFTs more in depth in a bit.
There are hundreds of thousands of ERC-20 and ERC-721 tokens across the crypto ecosystem. New tokens appear regularly to meet each blockchain's increasing demands and use cases, and the creation of new tokens isn't expected to stop anytime soon.
Characteristics of crypto tokens
Crypto tokens serve various purposes depending on their blockchains, including DeFi (decentralized finance) functionality, blockchain-specific crypto services, and even games. All crypto tokens, however, have some common characteristics. They’re all:
- Programmable: Programmability implies that crypto tokens run on software protocols of smart contracts that specify each token's characteristics and functionalities, in addition to its blockchain laws and guidelines.
- Permissionless: Crypto tokens are permissionless digital assets, meaning any individual or entity can access crypto tokens and blockchain networks without specific authorization.
- Trustless: Crypto tokens are built on a trustless framework. This means the blockchain they're built on isn't owned or controlled by any central authority or regulator. Instead, the blockchain and its tokens operate according to the blockchain's code and intended algorithm.
- Transparent: Decentralized blockchains allow crypto tokens and transactions to be transparent. As a result, all transactions and exchanges on the blockchain are publicly observable and verified by all its computer systems on its global network.
Applications of crypto tokens
Crypto tokens are digital currencies that hold value and can be bought and sold by investors and users on blockchains and crypto exchanges. However, they're designed to serve many purposes and can represent tangible, real-world assets or even conventional assets that serve a particular utility or service. For example, crypto tokens can not only represent physical items like art and collectors' items but can also serve as functional tokens for storage and computing.
Some tokens are commonly employed as a governance mechanism, allowing users to vote on criteria such as algorithmic changes, protocol updates, and other activities that influence the future development of different blockchains and frameworks. The process that enables crypto tokens to function as a governance mechanism is called tokenization. Some of the most commonly found tokens across various blockchains are NFTs and utility tokens.
What are NFTs?
Remember, NFTs are unique crypto tokens representing real-world items like music, videos, art, real estate, collectibles, and more. They’re digital representations that work on the same programming as cryptocurrencies. NFTs are crypto tokens built on other blockchain networks, most commonly Ethereum.
Let’s look at an example to understand NFTs a little better. Hand-made items like paintings have traditionally been valued due to their unique nature and aesthetic proposition. Once an artist paints a picture, it's a one-of-a-kind object that one can’t replicate to every exact detail. However, the same argument doesn’t apply to digital assets like NFTs. So how can we claim NFTs to be unique digital items if one can simply download a JPEG or take a screenshot of a picture?
This is where tokenization comes in. NFTs are unique due to tokenization, as users can "tokenize" digital assets to create a digital ownership certificate proving the creator's ownership and the NFT's legitimacy. Tokenization provides each NFT with its own unique set of metadata, which can verify the authenticity of each NFT and even show its ownership history.
Users buy and sell NFTs online. These digital assets have gained immense popularity in recent years, with some NFTs selling for millions of dollars. Here are some of the world’s most popular NFTs:
- Bored Ape Yacht Club (BAYC): BAYC is one of the world's most popular NFT collections, but you may have come across a BAYC NFT without knowing what it is. Built on the Ethereum blockchain, they include ape avatars with unique designs and appearances. Celebrities like Steph Curry, Eminem, and Jimmy Fallon are some of the many owners of BAYC NFTs.
- NBA Top Shot: The NBA Top Shot NFT collection is a unique project that allows basketball lovers and fans to collect one-of-a-kind memorabilia to commemorate their love for the game. It sells NBA Moments––a compilation of NBA highlights clips that users can also trade as trading cards––memorabilia as an NFT.
- CryptoPunks: No NFT list is complete without mentioning the CryptoPunks NFT collection, which features 10,000 pixelated punk-themed figures designed in an 8-bit art style. Like BAYC, the CryptoPunks collection has distinguishing characteristics that make it unique. CrypoPunks is one of the most expensive NFT collections of all time, with more than $2 billion in overall sales.
What are utility tokens?
Utility tokens are crypto tokens that perform a specific function within their blockchain and grant users access to a particular service or product on the blockchain's network. They aren’t coins that blockchain miners can’t mine. Instead, they’re generated at once and released into the blockchain at the will of the token's creator.
For example, game developers are adopting crypto tokens as an effective method to reward players. Tokens represent achievement badges, a medium of exchange, or proof of membership. Additionally, player contributions are measured, and they receive tokens as rewards. Tokens are issued on the blockchain and are an efficient way of incentivizing players without intermediaries.
As a result, we now see many games like League of Kingdoms incorporate crypto tokens into their in-game economy. League of Kingdoms allows its users to exchange digital assets through NFT technology. The game even employs a voting system to decide who gains control and governs the ecosystem.
As the crypto industry evolves, blockchains and other digital assets will continue to increase in number and functionality to meet the diverse demands of an expanding user base. This user base will range from individuals to large-scale corporations with billions of dollars in assets.
Creating digital assets is not as limiting as creating physical assets in the real world, so the digitalization of traditional financial systems is widely predicted to change how many sectors work and produce value for their customers, potentially unleashing a wealth of financial and social opportunities.
One such opportunity is through Worldcoin, which is a cryptocurrency company that seeks to put a share of its cryptocurrency in the hands of every individual on the planet. Better yet, they’re giving it away for free.
At Worldcoin, we believe in the power of crypto and want to share our excitement with the world. Join us in paving the way for digital assets in a growing crypto economy. Head to our blog to stay updated on the latest news on everything crypto!