What Is a Token?
While cryptocurrency coins are native assets of a specific blockchain, cryptocurrency tokens are created by projects built on top of already existing blockchains. For example, Ethereum (ETH) is categorised as a coin because it represents the native asset on the Ethereum blockchain. However, Dai (DAI), Uniswap (UNI), and Aave (AAVE), for example, are classified as tokens because they are projects built on top of the Ethereum blockchain.
To learn more about the differences between coins and tokens, read Crypto Tokens vs Coins — What’s the Difference?
Cryptocurrency tokens are created using a set of token standards specific to each blockchain. These token standards are essentially technical specifications, like a set of rules to follow. For example, token standards issued on the Ethereum blockchain include ERC-20, ERC-721, ERC-777, and ERC-1155.
Tokens run on software protocols, which are composed of smart contracts, generally outline the features, functions, and type of engagement with the network. Due to this, developers have since created different types of cryptocurrency tokens for specific use cases.
Types of Cryptocurrency Tokens
DeFi is short for decentralised finance, which refers to financial systems built on blockchain technology. Each DeFi ecosystem has its own token that allows for a wide variety of functions and can often be traded like any other cryptocurrency.
These are specialised DeFi tokens that give the holder certain rights, such as voting power. Commonly, the more tokens a user has, the more voting power.
Non-fungible tokens (NFTs)
Non-fungible tokens (NFTs) are a form of crypto tokens that represents ownership rights to a unique asset. NFTs are most commonly associated with specific digital artworks or virtual assets.
Security tokens are traditional securities, such as stocks, converted into digital tokens on a blockchain. Owners of these tokens also own part of the company in which they’ve invested.