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All You Need to Know About Crypto Tokens

14 July 2022
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All You Need to Know About Crypto Tokens
 / Tokens are Different From Cryptocurrencies / General Applications of Crypto Tokens / A Few Examples of Crypto Tokens / Buyer Beware / How To Evaluate a Token / Things to Look Out For: / TL;DR / 

Crypto tokens are a type of cryptocurrency that can be used to represent a variety of assets. Learn more about crypto tokens, the many different kinds, and what to look for before investing.

Crypto tokens are a type of cryptocurrency that can represent various assets, including traditional fiat currencies, commodities, and even other cryptocurrencies. Tokens are often created through initial coin offerings (ICOs), which are a way for startups to raise funding by selling crypto tokens to investors. Less frequently, tokens may be airdropped or given away for free to promote a new crypto project.

Tokens are Different From Cryptocurrencies

Terminology in crypto is fluid, and the word "token" is often used interchangeably with "cryptocurrency," but there's an important distinction between the two. A cryptocurrency is a native token on its own blockchain, like how BTC is the native coin on Bitcoin's blockchain and ETH is the native coin on Ethereum's blockchain.

On the other hand, a token is a crypto asset that lives on top of a blockchain. The most popular platform for launching tokens is Ethereum, which has hundreds of different tokens built on top. Tokens on Ethereum use the ERC-20 token standard, which defines a common set of rules that all Ethereum tokens must follow.

Typically, cryptocurrencies function as incentives to keep people participating in a blockchain's ecosystem (through mining, staking, or other forms of validation). At the same time, tokens have more specialized or unique use cases (tokens can also be staked, but this isn't always the case).

Think of it like this—cryptocurrencies are like oil, while crypto tokens are products that can be made from oil. Oil (cryptocurrencies) can exist on their own, but the products (tokens) wouldn't be able to function without oil.

General Applications of Crypto Tokens

Decentralized Finance (DeFi)—One of the most popular uses for crypto tokens is decentralized finance (DeFi), which refers to the shift from traditional, centralized financial products (like loans and insurance) to decentralized, blockchain-based equivalents.

Non-Fungible Tokens (NFTs)—Perhaps the most zeitgeisty crypto token application, NFTs are crypto assets with unique characteristics that make them impossible to interchange. The best-known example of an NFT is probably crypto art, but NFTs can represent any digital asset, from in-game items to collectibles and more.

Security Tokens—Security tokens represent ownership of a company or asset. From stocks to bonds to real estate to debt, security tokens can offer a more efficient way of buying, selling, and transferring ownership of traditional assets.

Utility Tokens—Utility tokens have a specific use case in the ecosystem of the crypto project that issued them. For example, a crypto exchange might issue a utility token that can be used to pay trading fees, or a file storage service might issue a utility token that can be used to sell unused storage space (or purchase additional storage space).

Initial Coin Offerings (ICOs)—An ICO is the crypto industry's equivalent of an IPO in the traditional stock market. When a crypto project wants to raise money by selling tokens, it will launch an ICO. Investors can purchase tokens in the ICO, hoping to invest in a crypto project with enormous potential.

A Few Examples of Crypto Tokens

USD Coin (USDC)—It's an ERC-20 token on the Ethereum blockchain. USDC is a dollar-pegged crypto token that allows users to send, receive, and store US dollars, designed to facilitate easy transfers between crypto and fiat currencies.

Basic Attention Token (BAT)— BAT is an ERC-20 token used to power the Brave browser's ecosystem. The Brave browser is a privacy-focused web browser that blocks ads and trackers by default. Users can opt to view privacy-respecting ads in exchange for BAT tokens, which they can then use to tip their favorite content creators, save themselves, or sell for other cryptoassets.

Chainlink (LINK)— LINK is an ERC-20 token used to power the Chainlink network, which connects blockchain-based smart contracts to real-world data. Called oracles, the data providers on the Chainlink network are paid in LINK tokens for their services. Oracles are essential for crypto to interface with the outside world, and the Chainlink network is one of the most famous oracle solutions in the crypto space.

Loopring (LRC)— The Loopring protocol is a layer-2 DeFi platform built on top of Ethereum that allows for the creation of decentralized exchanges (DEXs). LRC is the token of the Loopring protocol, and it's used to pay fees and provide liquidity and governance.

Buyer Beware

Since crypto tokens are often created through ICOs, which anyone can launch, there have been several scams and bad actors in the space.

To date, there are over 800 current ERC-20 tokens on the Ethereum blockchain, and many of them have minimal developer activity, little to no liquidity, and no tangible use cases beyond speculation.

How To Evaluate a Token

When evaluating a crypto token, it's essential to do your own research (DYOR) to understand the project, the team behind it, and its tokenomics (economic model behind it).

Remember, crypto tokens are a new and largely unregulated asset class. Before investing money, you should always be aware of the risks.

If something smells fishy, it's probably fishy. Be extra careful of crypto projects that promise guaranteed returns, have anonymous teams, or don't have a clear use case for their token.

Things to Look Out For:

  • Unclear or too complicated crypto token economics.
  • Vague or no use case for the crypto token.
  • Red flags around the team, such as anonymous founders or a history of dishonest behavior.
  • Lack of developer activity or community engagement.

TL;DR

  • Crypto tokens are a type of cryptocurrency that can represent a variety of assets, including traditional fiat currencies, commodities, and even other cryptocurrencies.
  • Crypto tokens differ from cryptocurrencies like Bitcoin and Ether in that they are not typically meant to be used as a currency or store of value but represent other assets or perform a function within a crypto project or ecosystem.
  • Scams and bad actors run rampant in the crypto token space, so it's essential to always DYOR before investing in any crypto project. When evaluating a crypto token, look for a clear and concise token economic model, a strong team with no red flags, and a use case that actually requires the crypto token.

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