What is a token?

Oct 16
Technically, "token" is just another word for "cryptocurrency" or "cryptoasset," but depending on the context, it increasingly has several more distinct connotations. In the first section, all cryptocurrencies—aside from Bitcoin and Ethereum, which are also technically tokens—are described. In the second, specific digital assets that run on top of the blockchains of other cryptocurrencies are described, as is the case with many tokens used for decentralized finance (or "DeFi").
Tokens can be used for a wide variety of purposes, such as selling rare things in video games or assisting with decentralized exchanges, and they can be traded or held like any other cryptocurrency.

Given the significance of tokens and the frequency with which this term is mentioned when investigating cryptocurrencies, it is helpful to comprehend some of the broader implications. The word "token" appears in the names of certain kinds of crypto assets in addition to the basic definitions given in the section above.

DeFi tokens, for instance, are a recent example of a new universe of cryptocurrency-based protocols that try to mimic the conventional activities of lending, saving, insurance, and trading in the financial system. These protocols create tokens with a variety of capabilities that can be traded or stored similarly to other cryptocurrencies.

Specialized DeFi coins known as "governance tokens" give holders a say in the direction of protocols or applications that, despite being decentralized, lack boards of directors or any other form of central control.

For instance, all users of the well-known savings protocol Compound receive the COMP token, which entitles its owner to vote when Compound is upgraded. You will receive more votes the more COMP tokens you possess.

non-fungible NFT tokens that signify possession of a certain physical or digital item. They can be used to make digital works more difficult to reproduce and distribute, and they have also been used to sell special virtual assets like rare items in video games or to release digital art in small amounts.

A new asset class called security tokens promises to be the cryptocurrency version of conventional securities like stocks and bonds. Their main application is the sale of company shares, much like the sale of stocks or fractional shares through conventional markets or other companies like real estate, without the necessity of a broker.

Security tokens are reportedly being investigated by both large corporations and startups as a potential financing alternative.

Created with