Entering the world of crypto can be challenging, understanding the terms and knowing the process can be overwhelming sometimes. But once you sail into the fascinating crypto world and learn about the economic possibilities there won’t be a step back.
Crypto tokens have been in the market since the early 2010s. Bitcoin was the first known cryptocurrency which paved the way for the development of many other cryptocurrencies in the future. With the abundant popularity of Bitcoins, developers began to create their own crypto tokens by utilizing blockchain technology.
Key takeaways
- Crypto tokens are digital assets built on existing blockchains like Ethereum or Binance Smart Chain.
- Crypto tokens and cryptocurrencies are different.
- Popular crypto tokens are Tether, Shiba Inu, USD coin, Chainlink, and Uniswap.
- Crypto tokens eliminate the need to create a new blockchain every time while building a token.
- The popularity of crypto tokens lies in the advantages they pose, including improved security, transparency, high liquidity, increased returns, and reduced transaction fees.
- Regulatory uncertainty and increasing volatility are the main challenges people face while investing in crypto tokens.
What are Crypto Tokens?
Crypto tokens are digital assets that are built on an existing cryptocurrency blockchain. These tokens represent the value of certain things depending on the purpose for which it is developed including ownership, access to certain services, or physical assets like real estate.
Crypto tokens are also used to raise funds for projects which are done through an Initial Coin Offering (ICO) process. These tokens don’t own a blockchain themselves but utilize the blockchain of cryptocurrencies. Crypto tokens are stored in blocks that are linked to each other. Bitcoin, Tether, and Non-Fungible Tokens are examples of Crypto tokens.
Importance of Crypto Tokens
Creating a crypto coin is not easy, it involves several processes. A developer has to build a blockchain that can perform quick transactions without compromising security standards. The process doesn’t get along with building a blockchain, it also requires validators to confirm the transactions.
Using a digital token eliminates all these cumbersome processes. It allows developers to create a cryptocurrency without the need to develop a blockchain. A digital token utilises an existing blockchain which already has a secure system for validating transactions and running smart contracts.
How Does a Crypto Token Work?
Crypto tokens are digital assets that can be bought, transferred, traded, or sold. A blockchain wallet stores the crypto tokens. When a transaction is initiated the blockchain verifies the identity and authorizes the transactions. Transactions of crypto tokens are processed on the blockchain in which it is built.
Steps involved in building a crypto token
Creating a crypto token involves different processes.
- Analyze the need
Before designing a crypto token, a developer must have a proper idea of the purpose of the creation. It can be created for utility, deFi applications, or voting. The developer must decide on the supply limit, whether fungible or non-fungible or has to feature any unique quality before initializing the design phase.
- Select a suitable blockchain
Choosing a blockchain is an important task in building a crypto token, as it has to validate transactions and be able to run smart contracts. Ethereum is the most suitable blockchain platform for crypto tokens.
- Plan the collection, allocation, and utilization
A crypto token has to be introduced to the crypto ecosystem, and before that, a developer has to determine the distribution method, whether public or private sale, stakes for holders, supply cap, utility, demand, and many more. For the long-term success of a crypto token balancing the demand and supply is necessary.
- Issuing crypto tokens
A crypto token can be issued in many ways, like initial coin offerings, token offerings, or fundraising mechanisms.
- Transaction of crypto tokens
After a crypto token is issued it is ready for transferring across the decentralised blockchain network. To enhance security and transparency across the platform the transactions are recorded in distributed ledgers with the help of smart contracts. Crypto transactions are under regulatory laws, hence they can undergo creation, destruction, and freezing.
Advantages of using a crypto token
The crypto industry is gaining immense popularity over the past few years. People began investing in cryptocurrencies as they offers more security and transparency.
1. Easy conversion
Crypto tokens are easy to convert to other forms of currencies including fiat and other cryptocurrencies. Investors can buy and sell crypto tokens on various platforms including online casinos.
2. Reduced intermediate cost and transaction fees
Blockchain eliminates the need for third-party interaction during crypto transactions, hence reducing the intermediary cost. The transaction fees for crypto tokens are comparatively lower than any other currency transaction.
3. Improved opportunities
The crypto industry operates independently and its stakes are not affected by the traditional financial organizations. The diversification of the crypto platform helps to strive against inflation and other economic imbalances and maintain overall potential growth.
4. Increased returns
Investing in crypto tokens increases the chance of gaining more than the invested amount. The value of crypto tokens changes over time, and considering the present scenario, the chances of a gain are higher than a loss.
5. Immutability and transparency
Crypto tokens are built on decentralized and immutable blockchains and ensure safety and transparency during transactions. The robust security measures integrated with blockchain technology make it difficult for hackers to manipulate or retrieve user data.
6. Reduce dependence on banks and similar organizations
Crypto tokens allow people to transfer assets easily and securely without relying on traditional banking systems. Traditional bank transfers require documentation and high transaction fees, a crypto token eliminates this issue.
Are crypto tokens and cryptocurrency the same?
Cryptocurrencies are digital currencies that serve the purpose of traditional fiat currencies. Cryptocurrencies run on their own decentralized blockchain network. Bitcoins, Ethereum, and Litecoin are the most popular cryptocurrencies.
Crypto tokens are not mere currencies they serve as an ownership asset, voting power, access rights, and virtual rewards in online games. These tokens run on an existing blockchain network and eliminate the need to build a blockchain every time. Crypto tokens can be customized and programmed by adding unique features using smart contracts.
Major differences between cryptocurrency and crypto token
| Cryptocurrency | Crypto token |
| Cryptocurrencies have their own blockchain. | Crypto tokens are built on an existing blockchain. |
| Cryptocurrencies are used as currencies. | Crypto tokens are used as ownership representation, power for decision-making, and access rights to a service. |
| The price of a cryptocurrency is determined by its store value. | The price of the crypto token is determined by the demand for the blockchain they use. |
| Cryptocurrencies are decentralized. | Crypto tokens are subject to the control of developers or organizations that created them. |
Different types of Crypto Tokens
Based on the purpose they serve crypto tokens are of different types.
- Security tokens: Security tokens represent the ownership of an asset and follow strict security regulations and standards.
Example: tZero and Polymath (POLY).
- Utility tokens: Utility tokens allow access to certain products and services within a decentralized blockchain ecosystem.
Example: Basic Attention Tokens (BAT) and Golem (GNT).
- Governance tokens: Governance tokens give the right to the owners to participate in the decision-making process of an autonomous organization. They allow the holders to cast votes on changes and empowerment of the organization.
Example: Maker (MKR) and Compound (COMP).
- Stablecoins: Stablecoins peg their value with another asset like gold or fiat currency and thereby provide stability in value.
Example: USD and DAI.
- Wrapped tokens: The value of a wrapped token changes with the other currency in a 1:1 ratio. They are mainly used when shifting from one blockchain to another.
Example: Wrapped Bitcoin (WBTC).
- Non-fungible tokens: Non-fungible tokens are used to represent the ownership of digital assets like gaming equipment or other unique products. They are non-interchangeable.
Example: NBA Top Shot and Cryptokitties.
Challenges involved in Crypto Token investments
Crypto tokens have a higher potential to make money, though there are certain challenges an investor faces while investing in crypto tokens.
- High volatility
Crypto tokens have the tendency to increase and decrease their value over time. The value of crypto tokens is determined by factors like regulatory guidelines, market demand, and technological changes. The fluctuation in price can lead to substantial losses sometimes.
- Limited regulations
The decentralized blockchain networks are not controlled by any regulatory bodies. Though the system ensures security and transparency, if any fraud or looting occurs nothing can be done.
- Technological threats
It is obvious that blockchain and smart contracts enhance security and safety, however, if any code manipulation occurs in the system can even result in the stealing of funds.
- Higher power consumption
The cryptocurrency mining process requires a large amount of current energy to perform complex calculations. The carbon footprints associated with crypto mining cause adverse effects on the environment.
- Uncertainty in existing laws
Some countries have welcomed the crypto industry with warm hands, understanding the ability to foster the development of the country. While other countries have made strict regulations on definite cryptocurrency activities. This uncertainty affects the value and usage of crypto tokens.
Bottom line
The increasing popularity and opportunity in the crypto industry make people learn their scope in the existing digital landscape. Investing in a crypto platform increases the liquidity, transparency, and security of the holdings. However, volatility and legal uncertainty limits the opportunities in the crypto industry.