Crypto Tokens | Definition, How They Work

If you want to invest in cryptocurrencies, you need to understand crypto tokens and how they work.

Over the years, there has been a continuous rise in the issue of pump and dump in the cryptocurrency market causing newbie investors to lose large sums of money. 

This is mainly because anyone can create a crypto token. Because crypto tokens are different from cryptocurrency and even altcoins, it is very easy to create a cryptocurrency token. As a result, many developers launch worthless tokens in a bid of making a quick buck.

If you don’t understand their differences, you could invest in the wrong asset and end up losing money. For this reason, it’s important to comprehend what a crypt token is and how it differs from other cryptocurrencies and altcoins.

Crypto-Tokens-Definition-How-They-Work

This article will explain what crypto tokens are, how they work, and how they vary from cryptocurrencies and altcoins.

What are Crypto Tokens?

Crypto tokens are digital assets that can be created by users and are produced and operated on the blockchain of another cryptocurrency. These digital assets are utilized in blockchain transactions for several purposes, including investment, storage, and payment.

Crypto tokens use an existing blockchain, most frequently Ethereum, whereas cryptocurrencies like Bitcoin and Ethereum have their own dedicated blockchain.

Smart contracts or decentralized apps are utilized in such blockchains to process and manage the different transactions that occur on the blockchain.

In essence, a blockchain serves as the foundation for all cryptocurrencies. As a result, a cryptocurrency is seen as a token of its blockchain that is used by another coin rather than its own.

READ ALSO: When Should I Invest in Bitcoin?

Why are Crypto Tokens Important?

With the aid of crypto tokens, developers can use the blockchains of already-existing cryptocurrencies to build new ones. This accelerates, simplifies, and lowers the cost of creating coins.

A blockchain must be resistant to attacks and capable of processing transactions swiftly and affordably.

A new cryptocurrency needs validators to vouch for its transactions because cryptocurrencies are decentralized, therefore creating the blockchain is only the first step in the process. Hence, they rely on users deciding to use their computational power to validate transactions on the blockchain.

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Additionally, new token creators must consider how they will attract enough validators to maintain the blockchain’s security and prevent fraudulent transactions.

So, instead of creating a blockchain from scratch, creating a crypto token is faster since developers can effectively use an already-existing blockchain like Ethereum.

How do Crypto Tokens Work?

Crypto tokens are assets with value built on existing blockchains. They are often transferable, tradeable, buyable, and sellable, and are kept in blockchain wallets.

Transactions involving a crypto token are handled on the blockchain that it utilizes. For example, because a token like a Chainlink is built on Ethereum, all Chainlink transactions will be handled by the Ethereum blockchain.

Crypto tokens, in addition to serving as a currency, can fulfill a variety of other functions. That is what we will be looking at.

You can also read: What is Ethereum and how does it works?

Uses of Crypto Tokens

The following are a few of the most common uses for crypto tokens:

#1. Governance Tokens

These are unique DeFi tokens that grant holders voting rights in future cryptocurrency projects.

Because crypto tokens are decentralized, they do not have boards of directors or any other central authority.

Token holders can vote on ideas that will help influence the future of that specific cryptocurrency. The more tokens you own, the more voting power you have.

#2. Decentralized Finance (DeFi)

DeFi is a new banking and financial services concept based on peer-to-peer payments made possible by blockchain technology.

It’s a cryptocurrency-based protocol aimed at replicating traditional financial-system operations including lending and saving, insurance, and trading.

Furthermore, Decentralized Finance tokens can be exchanged or retained in the same way that any other cryptocurrency can. Each DeFi platform has its own token that serves as the platform’s official currency.

#3. Non-Fungible Tokens (NFTs)

NFTs are digital assets that reflect Internet assets such as art, music, game products, and videos that are bought and sold online using cryptocurrencies and authenticated by blockchain technology.

A non-fungible token grants ownership of the asset to the buyer, making it more difficult for digital works to be reproduced and distributed.

Top Crypto Tokens

Having described what crypto tokens are, let’s examine some of the more popular ones:

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#1. Axie Infinity:

Axie Infinity is a non-fungible token that focuses on online video games developed by Vietnamese studio Sky Mavis and it’s built on the Ethereum network. Axie Infinity, one of the most well-known play-to-earn (P2E) platforms available, uses a utility token called Smooth Love Potions (SLP).

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#2. Chainlink (LINK):

Chainlink is an Ethereum-based decentralized blockchain oracle network. The network was designed to make it easier to transport tamper-proof data, outputs, and computations from off-chain sources to on-chain smart contracts.

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#3. Tether (USDT) and USD Coin (USDC):

they are stablecoins designed to maintain a price of dollars, and they’re both built on the Ethereum blockchain. Stablecoins are cryptocurrencies whose value is tied to another currency, commodity, or financial instrument. They seek to provide a realistic alternative to the extreme volatility of cryptocurrencies.

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#4. Uniswap (UNI):

Uniswap is a token of the decentralized cryptocurrency exchange that employs a decentralized network protocol. The network uses smart contracts to automate transactions between cryptocurrency tokens on the Ethereum blockchain.

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Cryptocurrencies vs. Altcoins vs. Crypto Tokens 

The words cryptocurrency and altcoins have become interchangeable terms in the field of digital currencies. But there are differences between these phrases.

The most well-known cryptocurrency is Bitcoin, which is a standard form of money used for sending and receiving payments on a blockchain.

Alternative cryptocurrencies known as “altcoins” were introduced following the enormous success of Bitcoin. They were introduced as improved Bitcoin alternatives that aimed to address some of the drawbacks of the original currency. Consequently, altcoins are alternate currencies to bitcoin. Altcoins like Litecoin (LTC), Cardano (ADA), Ether (ETH), and Dogecoin (DOG) are some of the more well-known varieties.

Generally, coins established on other blockchains that allow users to generate their tokens are known as crypto tokens.

As a result, they rely on existing blockchains, such as the Ethereum blockchain, to function.

In essence, cryptocurrency and altcoins are essentially distinct virtual currencies with blockchains that are largely utilized as a vehicle for digital payments.

Crypto tokens, on the other hand, work on a blockchain, which serves as a platform for the development and execution of decentralized apps and smart contracts, and the tokens are used to facilitate transactions.

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FAQs About Crypto Tokens

Tokens that reside on Blockchains?

Tokens that exist on blockchains include reward tokens, currency tokens, utility tokens, security tokens, and asset tokens.

Can crypto tokens be converted to cash?

Yes. You can exchange cryptocurrency for cash using a crypto exchange. After selling your token on the exchange you can transfer the money to your bank account if you wish.

Can I buy a crypto token?

Yes. You may purchase cryptocurrencies, and one of the most well-liked places to acquire and sell a variety of cryptocurrencies is on cryptocurrency exchanges. Users can often place buy or sell orders for cryptocurrency tokens against other cryptocurrencies or local currencies on a crypto market.

When should I sell tokens?

Generally, investors buy tokens when they are low, and sell when the price plummets. So, the rule is to buy low and sell high. However, if the value of your tokens falls and you no longer believe cryptocurrency is a suitable investment, you can sell.

How much money do I need to launch a crypto token?

The cost of creating a smart contract can start as low as $3,000, but it increases as the logic becomes more intricate and the number of tokens needed increases.

Conclusion

Although the general public confuses crypto tokens, altcoins, and cryptocurrency, they are not the same thing. And thanks to this post, we’ve been able to distinguish between them and delve deeper into what a crypto token is and how it operates.

To avoid losing your hard-earned money, keep in mind that anyone may create a token, thus you must always investigate any token you are considering investing in.

We hope you find this article helpful.

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