What Is A Token In Cryptocurrency?
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Blockchains typically use tokenized transactions, and those tokens are known as cryptocurrencies. A cryptocurrency token is a store of asset value, and what asset is being represented varies wildly based on the blockchain.
In a vanilla blockchain like Bitcoin, the cryptocurrency BTC represents financial value. In a commodity-backed blockchain like Hempcoin, the cryptocurrency THC represents industrial hemp.
Projects like NEO/GAS are dual-token blockchains, where NEO is a digital security token, while GAS is used to power tokenized transactions on the NEO network.
Blockchains like Ethereum support development of additional cryptocurrency tokens, and projects likes Tron, EOS, and VeChain Thor started as Ethereum-based tokens.
Because Ethereum supports other coins, different protocols, called Ethereum Request for Comment (or ERC) standards, exist. ERC-20 is the most popularly used Ethereum token standard, while ERC-721 tokens are used for non-fungible crypto collectibles like CryptoKitties and the Forever Rose.
Token-hosting platforms like Ethereum created a divide in crypto in which the term “coin” is used to describe self-hosted cryptocurrencies like Bitcoin, while “token” is used to describe proprietary tokens hosted on third-party blockchains.
Vanilla cryptocurrency tokens also come in different flavors, such as privacycoins like Monero XMR and stablecoins like Tether USDT. Privacycoins provide enhanced privacy and anonymity, while stablecoins are tied to the value of another (typically fiat) currency.
Cryptocurrency tokens are usually “mined” by processing blockchain transactions. Each blockchain has a different mining method, including Proof-of-Work, Proof-of-Stake, Proof-of-Skill, and hybrids of each model.
Cryptocurrency tokens are stored in wallets and can be exchanged using private/public key combinations. Many cryptocurrency transactions are exchanged directly, but cryptocurrency exchanges like Binance exist to make converting tokens between each other and cashing out easier.
Benefits of cryptocurrency tokens are immutability, verification, speed, and low cost of transactions versus fiat currencies. Critics point out the usage of tokens for darknet purchases, attractiveness to hackers and scammers, and increased government scrutiny.
Still, cryptocurrency tokens are seen as the future of finance by many, and coins like Bitcoin are being more regularly accepted by merchants and other organizations as a form of payment.
The author is not currently invested in digital assets.