A crypto token is a unit of value issued by a tech or crypto start-up with an intent to be a part of the ecosystem of their technology platform or project. Tokens are supported by blockchains. They only physically exist in the form of registry entries in the said blockchain. Initially, most tokens were based on the ERC-20 protocol by Ethereum.
Tokens are different from Bitcoin and altcoins in that they are neither mined by their owners nor primarily meant to be traded (although they may be traded on exchanges if the company that issued them becomes valuable enough for the publicity), but to be sold for fiat or cryptocurrency in order to fund the start-up’s tech project.
Difference between tokens and cryptocurrencies
The main difference between cryptocurrencies and tokens is belonging to a certain project (ICO, Crypto Collectibles, etc.). Tokens can be a payment in a certain system based on the cryptocurrency network.
Cryptocurrency is a part of the blockchain system, and tokens are based on the blockchain. Tokens are built on a ready-made platform. Moreover, the failure of the parent blockchain will affect the circulation of tokens in the network and will probably severely undermine the work of the issuing project. Failure of tokens will not affect the operation of the blockchain.
Therefore, crypto token functions are bound to their issuer. In contrast to cryptocurrencies, tokens are not mined, they are issued by the company during the ICO or token generation event (TGE). Token value and investment attractiveness are determined by the actions of the organization that issued them.
Types of cryptocurrency tokens
There are several types of tokens. It depends on the purpose of the supply of tokens.
Equity tokens are an analog of a share in a project or company in which a token holder can receive a share of the profits.
Utility tokens give a certain value or opportunity within their platform. An asset-backed token is a token provided by a real commodity, for example, gold.
Platforms for issuing tokens
Ethereum was a clear leader of the token issuance platforms segment. It uses a PoW algorithm called Ethash, which was developed by Vitalik Buterin, like the platform itself.
Waves is a product of the Russian programmer Alexander Ivanov caught up with the leader a few months after the launch. The developers initially relied on the PoS protocol, and later in the advanced version — on the Leased PoS.
The platform offers a wide range of opportunities for business projects’ fundraising. The latest blockchain platform EOS is based on the algorithm of asynchronous smart contracts. Due to the parallel execution of a large number of transactions, the system can carry out up to 100 thousand transactions per second.
It should be noted that these are not all networks on which tokens emission is possible. Even on the Bitcoin blockchain, it is possible to supply tokens using Omnilayer, the most famous token is Tether (USDT).
Token standards in the Ethereum network
Soon after the launch of the Ethereum platform, it became clear that to simplify the interaction of cryptocurrency projects, it is necessary to use one type of smart contract. The first such type was the ERC-20. The most common application of tokens of the standard ERC-20 is the supplying of tokens during the course of carrying out ICO.
Examples of projects based on ERC-20
- iEx.ec is a cloud computing platform that aims to bring computers together in one giant network of computing power and plans to lower entry thresholds for those wishing to access high-speed computing.
- RCN is a network for p2p lending that uses blockchain and smart contracts for transparent transactions with the participation of the guarantor. The guarantor is a legal entity with access to local jurisdiction and fixed in the blockchain register of the borrower’s credit history, which evaluates the terms of the transaction and assumes part of the risk.
- Wings is a platform for the creation of Decentralized Autonomous Organizations (DAOs), which allows individuals and organizations to put forward a new proposal for the consideration of community members, as well as provides legal regulation tools for companies and individuals.
The main distinguishing feature of ERC-721 from the usual ERC-20 is the non-fungibility of tokens. This property determines the range of potential implementations of the standard. It is obvious that unique tokens are best suited for digitizing unique assets.
Examples of projects based on ERC-721
Certainly, one of the most sensational projects created on ERC-721 is CryptoKitties. CryptoKitties is a collectible game where players collect, exchange and breed unique digital kittens, each of them is represented by an ERC-721 token.
The Ethereum network has already created more than 100 thousand smart contracts describing new tokens, and it does not seem that this process has slowed down. Of course, most of the tokens will soon be unnecessary, but the rest will be able to bring a lot of new things.