Token and cryptocurrency are often used interchangeably because both are digital assets on blockchains. The most significant difference between a cryptocurrency and a token is that cryptocurrencies are the native asset of a blockchain like ETH on Ethereum blockchain, whereas smart contracts are used to build tokens on an existing blockchain. Tokens are very similar to cryptocurrencies, it means that they are a sort of currency that exists on a blockchain, and can be transferred between accounts. Unlike cryptocurrencies their behavior comes about by implementations in smart contracts instead of being built into the blockchain software itself. These smart contracts calculate the units of the token transferred between accounts. However, fees for transactions are lower when transferring the cryptocurrency compared to when transferring tokens.
How do tokens work?
You can compare crypto coins with the money you have in a bank account. As long as you own that amount, the money does not depend on any particular dollar bills or coins. On the other hand, tokens are “owned,” and each is an individual asset that you own. Coins use a system of public and private keys to facilitate transactions while smart contracts are used in exchanges made with tokens. You can program these applications to perform trades or transfers when certain conditions are met. Ethereum can be used as a platform to create other cryptocurrencies. There are currently three popular protocols for tokens on the Ethereum Network: ERC-20, ERC-721 and ERC-1155. ERC-20 is a protocol standard that defines rules and standards for issuing tokens on Ethereum. ERC-20 tokens are fungible, meaning they are interchangeable and of the same value. On the other hand, ERC-721 tokens are non-fungible, it means that they are completely unique and non-interchangeable. To simplify you can think of ERC-20 as money and ERC-721 as collectibles like baseball cards. ERC-1155 is fungible and non-fungible. People may need this standard in games where users have fungible assets like currency and non-fungible assets like rare items.
Where can you get tokens?
Cryptocurrency exchanges are common ways to get crypto tokens. These large-scale platforms facilitate trades across a wide array of different coins and tokens. They have some benefits including trade between different cryptocurrencies and regular currencies, manage various wallets, check the value of each crypto, and facilitate the process of sending and receiving currency. There are also other applications to get some tokens. For instance, there are some mobile apps which give crypto tokens to users that actively use their service.
Benefits of Cryptocurrency Tokens
Nowadays, while the world is accepting cryptocurrency as a payment option, Cryptocurrency tokens may be one of the most important innovations. Tokens would be the future of payments and investments as they are secure, reliable, and efficient way of trading.
We have a quick look at the advantages of Cryptocurrency Tokens:
- The code, transactions, and creators of tokens are all transparent.
- Tokenized assets allow people to easily trade any asset in the world without any arbitrator which will result in a frictionless market and remove a lot of barriers from the system.
- Integrations can be done in a decentralized fashion without the need of setting standards and creating dedicated channels.
- Tokens are valuable and can be exchanged and they also represent physical assets.
- As tokens can perform coded instructions through smart contracts, they can gain unique features and functions.