What is a Token in Cryptocurrencies and How to Use It?

An animated infographic showing tokens coming out from boxes

Even if you are new in the World of Cryptocurrencies you might have heard about tokens already – but maybe you don’t have any clue what they are all about and how they differ from crypto coins? Don’t worry, here I will provide you with all the crucial information regarding crypto tokens, give you an overview of the market and provide further details for each token itself.

What is a Crypto Token and What is the Difference Between Tokens and Coins?

When we talk about blockchain technology, the terms coins and tokens are interchangeable. Since we are talking about virtual things even a simple cryptocurrency coin like bitcoin is “just a token” representing some value. On the other hand, while coins are only usable for payments, tokens offer a wider functionality and also represent some goods, services or security aspects. Crypto tokens usually don’t have their own blockchain and are using other blockchains as their infrastructure. Tokens are also built on smart contracts, only blockchains supporting smart contracts are suitable for setting up tokens. Additionally, you need to keep in mind, dealing with tokens also requires fees to pay for the blockchain transaction itself.

Coins

  • Used only for payments
  • Have their own blockchain
  • Transaction fees are paid with the same cryptocurrency

Tokens

  • Bigger functionality for more then just payments
  • Usually based on other blockchains
  • Transactions fees are paid in a different coin/token depending on blockchain

What are Tokens Used for?

As mentioned, tokens can have multiple use cases, not just for exchanging money. Let’s have a look into a couple of examples.

  • Equity Tokens

    This token can represent a share of a company or some stocks. There are also Asset Tokens since there equity could represent commodities or goods.

  • Security Tokens

    This is the common use case when we are talking about ICO´s. A person is investing money with the expectation to make profit. Under swiss law this token is treated by the Swiss Financial regulators the same way as other securities.

  • Utility Tokes

    These are also called application token. Owning this token means you can exchange it for a service or a product. This might be a rare case for now, because of the very volatile prices at the crypto market, but could become a regular use case for the future.

  • Payment Tokens

    These tokens have no other use than for payments or sharing value. The usage of this tokens might be no different to a coin, but if they are just based on another blockchain it might have a different value. But this is a rather rare case which doesn’t make much sense.

Why Developers Create a Token Instead of a Coin?

A part of this answer you got in the section before. Cryptocurrency tokens have some additional functionality over the simple payment use case you have with coins already. Therefore, one big reason for creating a new token over a new coin is the functionality you need for your project.

Crypto tokens offer the functionality to represent shares. This option can be used to raise money for a new project and give away shares in return. Developers of a new project can implement this way easier, than collecting fiat money and having to manage all the paperwork that comes along with it.

Another big argument for using a token over a coin is the existing infrastructure of a certain blockchain. Instead of coding all the software needed for your own blockchain, and to make it public and convincing people to use it, you build a token on top of another blockchain and the peer-to-peer network with all its nodes and miners.

List of Tokens

You are looking for some Information about a specific Token? Here you will find the list of all tokens I’ve reviewed in detail. Click on the token of interest find all about its history, purpose and technical details, as well as suitable wallets to hold and use this token. Of course, crypto exchanges where you can buy or sell these tokens are included too.

Types of Cryptocurrency Tokens

Since crypto tokens are based on other blockchains, the denomination of this types is an indicator on which blockchain they are using as their platform. The most popular token today is the ERC20 token, where ERC stands for Ethereum Request for Comments. All ERC Tokens are based on Ethereum. The 20 is just the number of the request to become a standard. Each standard defines all the functionalities with commands and syntax. Let’s have a deeper look into ERC20 and some other common token standards.

ERC20

ERC20 is the most popular token standard by far. According to Wikipedia, there was a total of nearly 150.000 ERC20 token founded using the Ethereum platform. This standard defined the following functions and events:

Functions

  • totalSupply public view returns (uint256 totalSupply)
  • balanceOF(address _owner) public view returns (uint256 balance)
  • transfer(address _to uint256 _value) public returns (bool success)
  • transferFrom(address _from, address _to, uint256 _value) public returns (bool success)
  • approve(address _spender, uint256 _value) public returns (bool success)
  • allowance(address _owner, address _spender) public view returns (uint256 remaining)

Events

  • transfer(address indexed _from, address indexed _to, uint256 _value)
  • approval(address indexed _owner, address indexed _spender, uint256 _value)

The most interesting detail to this is the function to allow someone to take tokens from your account – if you allow him to do this. That’s why a smart contract is needed as a base for cryptocurrency tokens, otherwise this functionality would not be possible with a “simple blockchain” without smart contracts.

ERC20 might be the most popular and most used token type, but it’s far from being perfect or complete. That’s why other standards evolved further from here and added more functions and events to be more versatile.

ERC223

One reason for implementing this standard is basically a flaw in the ERC20 token. For example, it is possible for an ERC20 token to be lost when someone sends it to a smart contract while using the process of sending tokens to a normal wallet. It is estimated, that around 3 million USD are lost to this design flaw. The ERC223 standard uses the same function for both cases and also requires only one instead of two steps to process transactions. This will also result in only half of the gas needed compared to ERC20 transactions. Aside from this fix, there is no difference in functions and events, ERC223 is basically the better ERC20 and also backward compatible – but it’s still less famous and used.

ERC777

Like the 223, version 777 improved the ERC20 standard while being backward compatible. The big difference here is the “send” function doesn’t only transfer tokens but also Ether itself (the standard currency using the Ethereum blockchain). ERC777 is also highly customizable which allows people to build their own functionality on top of tokens. Another added functionality is the minting and burning of tokens, that might be needed for some special projects like for creating, sharing, trading, and using of renewable energy.

ERC721

The big difference here is that each token can have a different value (NFT, non-fungible tokens). This enables you to use tokens for unique individual assets –art, real estates, luxuries or even virtual cats like the famous crypto kitties. Also, the famous 0x protocol added the ERC721 token in its new v2 release.

NEP-5 (based on NEO)

This token standard uses the NEO blockchain. NEO evolved from Ethereum itself and therefor also supports smart contracts. The functionality and the commands are a bit different, but in general it offers similar functions like ERC20.

That is just a brief overview. There are more blockchains supporting tokens like Waves, NEM, Nxt or EOS.

How to Get Tokens?

For cryptocurrency tokens, as for all coins, there’s the option to go to an exchange and buy or trade tokens. Another way to obtain some are the infamous option of an ICO, but this might be not suitable for everyone. For holding and using tokens you’ll only need a compatible wallet, but there are also some details you should know first. Let’s have a deeper look into this topic.

Initial Coin Offering (ICO)

ICO´s skyrocketed in popularity, thanks to the media attention in 2018, as an easy and tremendous way to make money with crypto, but also get scammed big time. What is an ICO? Like the name suggests, it’s the first offering of this coin (token) initiated by the developers. The reason for pre-selling these coins/tokens is to raise money for developing the project further. The number of tokens for sale is limited and the price relatively cheap (compared to the expectations to sell the tokens later). The sale works usually like this:

  • you register for the sale to be eligible to buy a certain amount of tokens
  • you send a certain amount of cryptocurrency (usually Bitcoin or Ether) to a certain address
  • in return you get the agreed number of tokens you can hold or trade (after the presale is done)

Some ICO´s went very well and the investors got huge returns on their investment. This, together with the amazing rise in Bitcoin’s price, drew the attention of a lot of people wanting investing in ICO´s. At the same time this model of a still financially unregulated market was used to scam users. At this time the term FOMO become famous too – Fear of Missing Out let people invest their money thoughtlessly without taking their time to do a proper research. As a result, a lot of tokens became worthless because there was no real project backing their worth.

Crypto Exchanges

The safer way to get tokens is via a crypto exchange. Most exchanges only list tokens (and coins) if they are well established on the market and when they are sure that there is no scam behind. On the other hand, the price is not that cheap anymore as it was during the ICO. The best crypto exchanges for tokens should not only offer a lot of cryptocurrency tokens to trade or buy, they should be financially regulated and offer a safe and reliable service. They should also support a wide range of crypto and fiat currencies and payment options. Low fees and a reliable support are another criteria you should have in mind. The best exchanges in my opinion are:

Exchange Cryptocurrencies Fiat Money
0x, Omisego, Maker + 8 more USD Trade now
Tether, Binance coin, Zilliqa + 11 more BTC, ETH, BNB Trade now
Tenx, Golem, Aelf + 7 more BTC, ETH, USDT Trade now

Keep in mind: even in you buy tokens at an exchange, it doesn’t mean your investment is safe. The prices can change drastically in a very short time. Don’t invest any money you are afraid of losing. Also, you should own some coins of the blockchain your tokens are based on. You will need them to pay the transaction fees if you want to send tokens by yourself.

How to Access Your Tokens?

You can buy and trade for crypto tokens at an exchange at any time. But for holding assets the exchange is not a recommended option. If you want to keep them for a long period of time it is highly recommended to move them to your own wallet, because the exchanges are prime targets for hack attacks to steal huge amounts of coins/tokens. But what wallet you should use you might ask?

This highly depends on the token or respectively the blockchain the token is based on. Since the blockchain officially supports smart contracts and tokens, most of the wallets suitable for this blockchain are also compatible with their tokens.

Wallets for Ethereum-Based Tokens

Keep in mind: Even if the wallets support cryptocurrency tokens in general, it doesn’t mean they support your token type automatically. Sometimes you need to add a supported token manually to this wallet. Read the FAQ of your wallet to find out how to add more token.

Karl Latham

Investment Consultant / author

I am concentrated on providing my readers with trading insights that will alleviate the level of risk, helping them to ease into the crypto market and build up a long-term intent..