What are crypto tokens and how these are issued? In the earlier days of crypto, at one point, people used to talk about crypto coins, crypto tokens, and blockchain technology and used these terms almost interchangeably without knowing the actual difference between them.
However, over time, as Bitcoin, the first crypto coin, moved from its hyped stage to a more acceptable role in finance, people started to learn more about them and have a deeper understanding of blockchain technology and its capabilities.
This is when they came to know that crypto tokens are different from crypto coins.
Crypto as such is an integral part of the public blockchain since it powers up the network helping it to function well and incentivize the node operators for their support to the network.
Ideally, crypto can be referred to as tokens, coins, platforms or assets since the boundaries today are blurred.
Most of the time, all these terms may seem to be interchangeable but actually all these terms refer to different types of crypto and most people do not bother to know what sets them all apart.
Now, if you are also one who is confused about crypto coins and tokens, here is an article that will make you more knowledgeable.
In this article you will come to know what crypto tokens actually are and how these are issued.
Along with that there are also several other important aspects included in this article that are also good to know to participate in today’s crypto environment with more confidence.
These include the working process, the importance and purpose of the tokens and lots more. Therefore, better not skip any part of this article.
What are Crypto Tokens and How These are Issued?
If you follow the crypto circuit very closely you will see that these days a lot of people are talking about crypto tokens, their ownership, token exchange and Initial Coin Offerings or ICOs.
However, there still are lots of people who are completely unaware of the tokens and their relation to a specific blockchain framework and their vast scope for use and their importance.
If you look into the matter at the most basic level, a crypto token can be defined as a unit of value.
This is issued by a particular organization and is accepted by both the buyers and sellers.
In the crypto framework, it is essential that a token is backed up by an underlying blockchain network.
This means that a crypto token can be defined as a crypto coin that is built onto the existing blockchain.
This particular token has the support and value that is the same as the support and market value of the particular blockchain framework underlying it along with its capabilities.
Now, at this point, there may be a specific question that may come to your mind regarding the existence and need of crypto tokens.
Well, to understand that in a better way, you will need to step back a bit and start from the basics.
Comparing with Crypto Coins
Start with knowing the differences between a crypto coin and a crypto token.
Well, this, as such, needs a whole article but here is the gist of the matter.
Every crypto coin is built on a dedicated blockchain which is a public or distributed digital ledger.
It stores all the necessary information of a transaction made on the blockchain in blocks.
Every transaction needs to be confirmed before these are grouped to create a block which is then added to the blockchain.
All these blocks are linked to the previous block in the chain with a hash.
The information can also be of a complete program that runs on the blockchain. These are called smart contracts.
Now, if a particular crypto does not have its individual blockchain it has to be built on the blockchain of another crypto.
Crypto tokens are ideally referred to those digital assets that are typically built on the blockchain of another cryptocurrency, such as Ethereum.
Therefore, as it is evident, a cryptocurrency can be either a token or a coin depending on whether the native crypto is built on its own blockchain or not.
For example, Ether or ETH is a crypto coin since it is built exclusively on its own Ethereum blockchain.
On the other hand, Basic Attention Token, or BAT is a token built on the Ethereum blockchain.
Now, most of the tokens are built on the Ethereum blockchain since it is a programmable blockchain.
This means that the developers can utilize it to build and launch their own cryptocurrencies that run on the Ethereum blockchain and are distinguished as crypto tokens.
Ideally, the official term used to denote these particular crypto tokens is ERC 20 tokens.
This is a big deal because the developers find it much simpler and faster to create a crypto token which also costs quite less.
Talking about creation, it is much easier to create a crypto token than creating a crypto coin.
However, this beneficial feature also has a specific downside.
There are much more crypto tokens as compared to crypto coins that are either scams or are lackluster projects.
However, this does not mean all crypto tokens are not good for investing and all crypto coins are.
You will come across a lot of crypto tokens on the internet that have plenty of interesting use cases.
On the other hand, there are also a lot of crypto coins that do not come with any specific advantages or have any special use cases.
And, from the categorization point of view, all Altcoins and crypto tokens fall under the cryptocurrency category.
And, since Altcoins refer to all those cryptocurrencies other than Bitcoin, crypto tokens also fit in quite comfortably within the Altcoin category.
Typically, it is this categorization aspect that leads to all the confusions regarding crypto coins and crypto tokens. Well, not anymore!
Now, take a look at the working process of the crypto tokens.
The crypto tokens, just like crypto coins, are digital assets that have some value.
This means that you can do anything with crypto tokens as you can do with crypto coins.
You can buy, sell, trade or transfer them or hold them in your blockchain wallet.
The transactions made by using crypto tokens are processed on the specific blockchain that it is built on.
This means that all ERC 20 tokens will function on the Ethereum blockchain.
Importance and Purposes
One of the most significant importances of crypto tokens is that it is a much better and quicker option to launch a coin without requiring some serious technical responsibilities to create a unique blockchain.
Creating an entirely new blockchain framework for a new crypto coin is not an easy job and also takes a lot of time.
There are lots of considerations to make it successful and widely acceptable such as:
- It needs to be able to process transactions fast at a low cost and
- It must be resistant to cyber attacks or hacking.
However, it does not end there. It should also attract the validators to ensure security, lend computing power to, and prevent fraudulent activities on the blockchain.
Therefore, instead of creating a blockchain framework from ground up, it is better to use an existing blockchain to create a crypto coin, aka crypto token.
The crypto tokens serve a variety of purposes apart from playing the role of a currency. Some of the most common uses cases of crypto tokens are:
- Governance tokens: A crypto token can be used as a governance token. This will give the holder of the token the right to vote in a crypto project, proposals for development to ensure a secure future and more. The more crypto tokens you hold, you will have the more power to vote.
- Decentralized finance: A Decentralized Finance, commonly known as DeFi, is an alternative financial system that is built on and runs on blockchain technology. Each of these DeFi platforms uses its own official currency which is a crypto token. If you have such crypto tokens of a specific DeFi platform with you then instead of taking out a loan from a lender you can put up your tokens as collateral and get the same from the platform.
- Crypto rewards: The DeFi platforms mentioned above typically rely on the investors. They lend their own funds in crypto and in return they receive rewards as incentive. These incentives are typically paid out in these crypto tokens.
- Non-fungible tokens: A Non-Fungible Token or NFT is also a specific type of crypto token. These tokens usually signify the ownership status of a digital asset and store all relevant info about it. These digital assets can be anything from a piece of art to a GIF, an exclusive digital image to a particular character of any online game.
- Tokens allow people to use different items, products and services without spending cash. This can be coupons, vouchers, tickets, stocks, bonds, deeds, food stamps, and different bearer instruments.
- Few tokens are also created to relate to the internet infrastructure such as cloud storage and pay to enjoy services offered by the decentralized network of providers.
- Tokens can also be used for an open social network like Facebook and Twitter to make payments for messaging capacity. This will prevent the robot accounts and spam from tarnishing the quality and value of discussions held on the network.
The developers do not need to worry about the security aspect of the newly created token because the blockchain network that it will run on, such as Ethereum, is secure by itself. Therefore, both running smart contracts and validating a transaction can be made on it safely.
Now that you know about the significance and purposes of the crypto tokens, take a look at its different types.
Typically, there are two specific types of tokens. These are:
- Security tokens
- Utility tokens.
Here are the details of each.
The security tokens are also referred to as crypto security tokens or tokenized assets.
These tokens typically have the most traditional use cases and they normally symbolize the proof of ownership.
Apart from a few notable differences, the framework of these tokens is pretty similar to buying and selling of conventional stocks and bonds.
The security tokens are fully decentralized just like crypto coins. This means that:
- There is no government authority to regulate the transactions
- There are no national or geographic limits to its operation and
- Buying and selling parts of the assets is allowed.
Also, just like the crypto coins, there is no restriction in terms of time or day in which you can buy or sell these tokens. This means that there are no fixed trading hours. You buy or sell them at night, during the day, on Sundays and even on Christmas morning.
The security tokens also allow making a large number of investments and transactions.
This is made easier due to wider accessibility of the portfolio. However, the security tokens are restricted to the proof of ownership and financial blockchain frameworks.
The utility tokens do not deal much with the stake or ownership representation and are also a bit less conventional.
Instead, these tokens relate to a particular blockchain network and therefore have a distinct purpose.
For example, for storing large amounts of data traditionally an individual or an organization will need to rely on companies that offer data storage services such as Google, Amazon Web Service and others.
These companies however offer a very small online space for storing data to the individual and a comparatively larger space to the companies.
These specific companies typically have monopoly on this aspect and therefore they can literally do anything they like.
For example, they can dictate and charge high fees, access the information stored, and even track and sell the data depending on the company.
This is where the utility tokens are useful that use decentralized blockchain technology.
You can simply store a large amount of data in an encrypted form safely and securely on the hard drives of the computers of other people who are participating in the network.
Similarly, if you use render-based blockchain utility tokens you will be able to render animations and videos on the computers of other people even when the computers are not in use.
Utility tokens also help in logistics tracking, food safety, and product authenticity verification to prevent fake products.
Therefore, you can see that the utility tokens literally have endless use cases.
However, it is all based on the crypto exchange and on a particular blockchain network.
Now that you have a better understanding of the types and working process of the crypto tokens, take a deeper look into the issuance aspect of these tokens for their utility and security values.
In the world of crypto and blockchain technology, issuing a token is perhaps one of the most important processes.
In this process, to put things in the simplest words, the tokens are created and added to the total supply of coins.
However, the whole thing depends on the crypto and blockchain and therefore for different blockchain networks the issuance of crypto tokens may have different forms.
The entire process depends on complicated algorithmic calculations and the amount of tokens to be issued are regulated and determined on the basis of the particular blockchain ecosystem and its necessities.
This will ensure that the token functions properly as desired.
Moreover, the total supply of these tokens for each crypto may also be different and this amount is also calculated using the same complicated algorithmic functions.
Due to these complexities involved in the issuance and functioning of a crypto token, it is essential for the developers to ensure that the entire process is detailed and precise so that it works on the specific system.
They have to describe the process irrespective of the type and style of the crypto.
As you may know, there are different consensus mechanisms available and that can be used by the developers for issuing a token.
However, it will largely depend on the different setups of the different crypto blockchain networks as to which particular consensus mechanism will be chosen for the issuance of a particular crypto token.
For example, in the case of Bitcoin, the whitepaper should specify that the supply cap of this particular crypto coin is restricted to 21 million coins and its issuance will stop once this threshold is reached.
Now, coming back to the consensus mechanism, there are a few specific cryptocurrencies that follow the process of token burning.
This process is entirely the opposite of the token issuance process in which the tokens are destroyed or ‘burned’ permanently.
There are a few specific consensus mechanisms as well that depend on the combination of token burning and token issuance.
This ensures that there is an accord all through the network of nodes.
The process of token issuance is also referred to as the process of tokenization.
In this process a specific type of crypto token is used to add an asset that does not belong to the crypto ecosystem to the blockchain.
In such a particular situation, the token issuance process then becomes the development of a new crypto token that represents an asset outside of a cryptocurrency.
There are some specific rules followed during token issuance that vary according to the specific project.
These set of rules also help the investors to decide whether or not they will invest in a particular project or not.
In addition to that, this set of rules also facilitates in determining the value of the crypto token.
Therefore, it is clear that there are two specific ways in which the crypto tokens are issued and it entirely depends on the framework of the blockchain to determine whether it will be a security token or a utility token.
As in the case of security tokens, the process is pretty much the same and simple as issuing stocks in an IPO or Initial Public Offering that offers the holders an ownership in the company based on the amount of stocks held.
However, instead of issuing in an IPO, the security tokens are issued in an Initial Coin Offering or an ICO.
In the process, the security tokens are disseminated to the buyers, investors, and the founders.
This is typically done at the time of the ICO but can also be done at a particular period of time following that.
You can buy these security tokens just like you buy securities such as stocks and bonds.
Typically, there are virtually no regulations on security tokens as of now but there is a high possibility that some regulations will be imposed on it in the future.
As and when that happens, the crypto experts feel that companies would be more interested in ICOs rather than in IPOs.
On the other hand, the issuance of the utility tokens is more like issuing values and therefore you can gain access to these tokens in a different way as compared to the security tokens.
Ideally, the utility tokens are not designed to become like the traditional investments.
The process involves more of selling an idea to the people regarding a particular product or the future prospects of it.
Therefore, in other words, issuing utility tokens is more of selling the potential of a company to the people.
The concept is the same as investing in a startup simply based on the idea and the potential of it without any actual product in place.
For example, it is the same as booking your order for a limited edition watch or car that is yet to be manufactured and hit the market.
Looking at the issuance of utility tokens from a completely different angle, it is more like using blockchain technology to raise capital directly from the customers or the prospective customers rather than from the investors.
This means that the issuance of the utility tokens will not have the same kind of regulations or restrictions that would be in the case of the issuing the security tokens.
The issuance of the utility tokens so far however has not turned out to be just the way many people thought it to be.
Most of the utility tokens issued were thought to perform functions on blockchain networks of products and services that did not benefit in a large way from the blockchain.
For example, there were several gambling tokens issued to perform on specific blockchain platforms to help people place their bets on sports, eSports, and even in election outcomes.
The winnings were to be paid out in the specific tokens.
However, the harsh market reality showed something else.
The same thing, betting that is, can be done with cash or by a credit card. In such cases the winnings paid in cash or a balance added to the credit could be spent on buying goods or services in a traditional way.
The tokens did not offer such benefits since these are based on a specific blockchain network.
This literally means that the token as well as its chain was created to serve only a specific purpose that did not EXIST!
This is the irony of the issuance of the tokens and also is one of the biggest drawbacks of the tokens to become mainstream in spite of the fact that these coins were backed by Ashton Kutcher and March Cuban initially.
However, the creation and issuance of tokens continued because these proved to be of great value and offered a new and useful service in the field of logistics, tracking goods and proving authenticity of pharmaceuticals and food for safety.
Therefore, experts believe that development in this field will continue and more products will be issued in the near future that will have real market value.
So now that you know about the issuance of tokens and a few other aspects regarding it, it is left to look at how these are run on the blockchain network.
Ethereum is the most common and popular blockchain network to build and issue crypto tokens because, as said earlier, it is programmable and is very useful for all types of collective computational problems.
There is perhaps no other blockchain network that is better than it in terms of running a code and allowing others to interact with it and rely on the results.
The application code simply waits for someone to send some Ether to add an episode to the Ethereum blockchain.
It specifies the ownership of the sender of the newly issued token.
This means that in order to transfer this token further to someone else it will need the digital signature from the Ether wallet of the sender.
This creates a scarce supply of the token and this scarcity is somewhat guaranteed due to the variable in the application related to available total supply being declared clearly and is then added to the chain.
It also declares other facets of the code to the Ethereum log file.
When the developer feels that there is a need to increase the supply of the token a new application code with a new alternative amount of token supply can be created.
However, the old version of the application code will remain and cannot be altered.
This is because, just like all other blockchain networks, the Ethereum log file is also append-only.
This means that the previous entries cannot be modified without the consent of all the participants of the decentralized community of Ethereum miners to alter the Ethereum protocol altogether.
The best way to increase the supply of token is to create another application code that will allow a person or a group of persons, to adjust the total supply periodically.
This will allow creating a stable monetary policy.
However, in both the cases whether it is for specifying a fixed supply of tokens or for describing a mechanism to change the supply, the application codes are set in stone and cannot be changed once these are added to the blockchain.
Finally, in terms of issuance of crypto tokens one particular thing should be kept in mind.
The value of the token will depend on a variety of factors and there is no reason to believe that the value of the token will be the same as that of Ether since it runs on Ethereum blockchain and the shared computations describe the distribution and movements of the token.
These factors are described in the application code of the token created which includes and is not limited to the total supply of tokens, its market demand, and also the future use value of the token.
On the contrary, Ether is simply used as gas to run the application code related to the token on the Ethereum Virtual Machine.
Crypto tokens are not the same as crypto coins though the two sound pretty much the same.
Most users, especially the beginners do not know their difference and the need to create these tokens in the first place. This article is meant for those people.