Token is just another synonym for “cryptocurrency” or “cryptoasset” in technical terms.
However, depending on the context, it has taken on a couple of more specific connotations.
The first step is to define all cryptocurrencies that aren’t Bitcoin or Ethereum (even though they are technically also tokens). Such as several decentralized finance (or DeFi) tokens. Tokens can be useful for from facilitating decentralized exchanges to selling rare goods in video games.
The term “token” is common in the cryptocurrency world.
In fact, all cryptoassets are technically tokens, you might hear Bitcoin referred to as a “crypto token” or something like.
However, the word has come to have two distinct meanings:
- A “token” is a term that describes any cryptocurrency other than Bitcoin and Ethereum (even though they are also technically tokens).
Because Bitcoin and Ethereum are by far the most popular cryptocurrencies. (You could also hear the term “altcoin,” which has a similar connotation.)
- The alternative, more particular use of “token” is to designate cryptoassets that run on top of another cryptocurrency’s blockchain. DeFi coins like as Chainlink and Aave run on top of, or leverage, an existing blockchain, most often Ethereum’s.
- Tokens in this category assist decentralized apps in a variety of ways, from automating interest rates to selling virtual real estate. They can, however, be owned or sold in the same way as any other cryptocurrency.
Why are they important?
Given how frequently you’ll see the term while researching cryptocurrencies, it’s helpful to be aware of some typical meanings. However, certain cryptoassets have the term “token” in their name. Here are a couple such examples:
- DeFi Tokens- In recent years, a new universe of cryptocurrency-based protocols has evolved, with the goal of replicating traditional financial-system operations (lending and saving, insurance, and trading). These protocols create tokens that can be useful for a variety of purposes.
- Governance Tokens- These are specialized DeFi tokens that provide holders a say in the future of a protocol or software that doesn’t have boards of directors or any other central authority (due to its decentralized nature). For example, the popular savings protocol Compound issues all users a token called COMP. You earn more votes if you have more COMP tokens.
- Non-Fungible Tokens (NFTs)- NFTs represent the ownership rights to a one-of-a-kind digital or physical asset. They can make it more difficult to copy and share digital products (an issue anyone who has ever visited a Torrent site full of the latest movies and video games understands). They’ve also distributed a limited quantity of digital artworks or sell one-of-a-kind virtual assets, such as uncommon gaming items.
- Security tokens-Security tokens are a new type of asset that aims to be the crypto version of traditional securities such as stocks and bonds. Their primary application is to sell shares in a corporation (much like shares or fractional shares sold on traditional exchanges) or other businesses (for example, real estate) without the assistance of a broker.
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