How Do You Define Token In Cryptocurrency

Cryptocurrency is not a term that is unheard of by the mass public these days. However, a common mistake that people make is assuming that a crypto coin and a crypto token are the same. In this article, we will define token for you and understand it in depth, along with looking at the most popular form of token i.e. NFTs.

How To Define Token:

• In the crypto space, one can define token as a cryptocurrency that is built on top of a blockchain. 
• A token does not have its own blockchain, and this makes it different from a crypto coin. 
• Tokens therefore get the benefits of an existing blockchain without an independent infrastructure.
• They are used with decentralized applications, and rely on smart contracts. 
• You will find that some tokens use more than one blockchain to gain speed and bring down user costs.
• When a company undertakes an ICO, it resorts to issuance of tokens that get distributed to buyers. 
• A token is physically moved from one place to another as and when it gets exchanged.

We hope the above points that define token have helped you get a base understanding of what a token is. Now, let us move on to how tokens function. 

How Do They Work?

Whenever you send another user a token, it moves from your account to that user’s account. As a result of this, tokens can denote ownership or enable exchanges in property, such as with Non Fungible Tokens, which we will look at more in detail below. With the case of NFTs, each token is like a deed, showing your claim to a particular piece of digital artifact / art.

Unlike the case with crypto coins that use a system of private and public keys to enable transactions, exchanges that are made with tokens use smart contracts. Now, smart contracts are just programs stored on a blockchain that run (undertake trades or transfers) when certain conditions are fulfilled. Every blockchain that acts as a platform for tokens has a technical standard for defining a smart contract. One of the commonly known Ethereum tokens is ERC-20. ERC-20 has come out as the technical standard. All smart contracts on the Ethereum blockchain use it for token implementation. 

Types Of Tokens:

While there are many different types of tokens out there, we have listed a few of the popular ones:

Payment Tokens

They are coins, whose purpose is to serve as a medium of exchange. Their other functions include – store of value as well as serve as a unit of account. 

Payment tokens can be used for the purpose of purchase, sale, and they provide many of the same functions as that of currencies like the U.S. dollar, Euro, etc. However, it must be noted that unlike fiat currencies, payment tokens are not backed by a government and is not legal tender. 

Security Tokens

On the basis of supply and demand, the value of payment tokens can go up and down. A token’s value will go up, should the demand increase and supply decrease. 

One way to define tokens of this category is – they are digital, liquid contracts for fractions of an asset, which has value already, like real estate, or corporate stock. Such tokens relate to traditional securities such as shares and stocks. 

A noteworthy feature of the majority of security tokens is the right it gives users to have some say in what happens in the company that has issued them. So when you buy a security token, you become an important shareholder. The money invested by you is directly impacted by the company’s value. Investors can expect their ownership stake to be preserved on the blockchain ledger.

Utility Tokens

These are commonly issued at ICOs. The holder of such a token is able to access a product or service that is blockchain-based. Utility tokens aren’t made for direct investment; rather you can use them for payment of services in their specific ecosystems. 

The tokens are mostly pre-mined. This means they are made together at once. They then get distributed in a way that the team behind the project deems right. 

Non Fungible Tokens

They are the rage these days. The simplest way to define a non-fungible token is that it is a unique digital asset. You can also define non-fungible tokens as a unique type of assets that cannot be replaced or replicated. NFTs represent real-world objects such as in-game items, art, music, and videos. They can be purchased and sold online, and are usually encoded with the same underlying software as most cryptos. 

Considering that NFTs are widely popular, let us look at them more in detail. 

Why Are NFTs Popular?

As stated above, you can define non fungible tokens as unique assets created over a blockchain. Anyone can view the NFTs, however, only the buyer gets the status of being the official owner. This means an NFT can only have one official owner at a time. Additionally, they are secured by the Ethereum blockchain. Therefore, no user is able to modify the ownership record.   

How To Buy And Sell NFTs?

Now, coming to the point on how you can buy NFTs. Owning an NFT does not mean right-clicking the image of an NFT and saving it. The file you have saved does not contain any information that makes it part of the blockchain. Additionally, it will not be recognised as the original. To buy an NFT, there are a number of platforms out there where you can make the purchase. You will need a wallet that pertains to the platform from which you are making the purchase and the wallet will need to have that much cryptocurrency necessary for buying. 

If you want to try your hand in selling NFTs, there is room for that too. You can sell them on marketplaces. The sale process will differ from one platform to another. Your content will need to be uploaded to a marketplace. After this, just go through the instructions for turning it into an NFT. You can then provide a description of the work and put up the suggested pricing. 

Conclusion

We hope the above points on how you can define token and the manner of its working have helped you grasp the crypto world better. If you are interested in getting a token, the most common route that users take is via crypto exchanges. They are large-scale platforms that allow trades across a large array of various coins and tokens. On this, you can trade among different cryptocurrencies and regular currencies, look at the value of every crypto, manage your wallets, and undertake the process of receiving and sending currency.

It is important to note that some tokens get issued through other applications. Some of the newer mobile apps for instance give tokens to those who regularly use their service. Lastly, before you deal in crypto token, please make sure to read up the risks involved and the terms and conditions carefully. Volatility is one of the major factors that must be taken into consideration.