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What are Crypto Tokens: How Do They Work

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05.12.2023
5min.
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What Are Crypto Tokens and How Do They Work

In this article, you will find detailed and clear information. What are tokens in crypto? What are crypto tokens used for? How to buy crypto tokens? These are the questions we will answer today. Enjoy reading!

What is crypto token

A crypto token is like a digital coin that exists on the internet. Imagine playing a video game where you collect coins to buy items. In the same way, you can collect and use crypto tokens to buy things, store value, or trade them with other people, but it’s all happening in real life. Crypto tokens are created and managed using a special technology called blockchain, which acts like a digital ledger or notebook that keeps a record of all the transactions.

There are many different types of tokens. Many know coins like Bitcoin and Ethereum, but in fact, there are thousands of different tokens. Each one has a unique name and purpose. Some can be used for buying goods and services, while others are used for things like voting or accessing special digital platforms.

How does a crypto token work

Now that you know what is crypto token, let's see how it works. Imagine that you have a digital wallet (like a real-life wallet, but on your computer or phone) where you can store your tokens. This wallet has an address: something like a bank account number, so people know where to send tokens when you want to receive them. Unlike bank accounts, crypto wallets are secure and anonymous, so you don’t need to provide any personal information.

When you want to send tokens to someone else, you need their wallet address. You'll then use your wallet to create a transaction, like writing a note saying, "I'm giving X tokens to this person's address." This transaction gets added to the blockchain, which is like a giant notebook that keeps track of all the transactions happening between wallets.

You may already know that the blockchain is updated by miners. They are users that provide their computer powers to solve complex puzzles to add new transactions to the ledger. When they successfully add a block of transactions, they are rewarded with new tokens. This is what is called mining. The mining process ensures that transactions are secure and the ledger is accurate. In recent years, mining has become less popular, giving way to staking. Well, there are many different mining and staking algorithms, but this is too complicated for such a basic article. The key idea is that these algorithms keep a blockchain secure, stable, and decentralized.

Once your transaction is added to the blockchain, the person you sent cryptocurrency tokens to will see them in their wallet. This process might take a few seconds or minutes, but it's secure and doesn't require any banks or intermediaries.

Main types of crypto tokens

There are mainly four types of crypto tokens and coins:

  1. Currency tokens and coins (aka value tokens) like BTC or USDT are primarily used for buying goods and services or storing value. They are like digital versions of traditional money.
  2. Utility tokens give you access to specific features or services on a platform or app. They can be used for things like voting (governance tokens), getting discounts, or using special features. Examples of utility crypto tokens include WBT and WSD.
  3. Security tokens represent ownership in an asset, like shares in a company or real estate. They can give you rights to profits, dividends, or interest payments. Examples of security crypto tokens include tokens issued during Security Token Offerings (STOs). NFTs can also often be security tokens.

What are utility tokens

Utility tokens are digital tokens that give you access to specific features or services on a platform or app. Think of them as tickets or tokens you would use at an amusement park or arcade. You can use utility tokens to do things like:

  • accessing special features within an app or platform;
  • getting discounts on goods and services;
  • voting on decisions related to the platform.

For example, WSD is a utility/governance token used on the WhiteSwap DEX. You can use it to vote on the listing of new tokens on the platform.

What are security tokens in crypto

Security tokens are digital tokens that represent ownership in an asset, like shares in a company, real estate, or other investments. They are similar to traditional securities, such as stocks or bonds, but in a digital form. What are such cryptocurrency tokens used for?

  • Receiving profits, dividends, or interest payments.
  • Voting on decisions related to the company or asset.
  • Selling the tokens to other investors.

Security tokens are usually issued through Security Token Offerings (STOs), which are similar to Initial Public Offerings (IPOs) for stocks. They must follow specific regulations and laws, depending on the country they are issued in. This is to protect investors and ensure that the token issuers are transparent and trustworthy.

So, now you know more about the main types of crypto tokens. In fact, this is not all that you need to know about them, but not all at once. For now, this is enough for a basic understanding. We will go into detail in another article.

What is tokenization in crypto

Tokenization in the context of crypto refers to converting real-world assets, rights, or services into digital tokens on a blockchain. By creating digital tokens representing these assets, rights, or services, you can easily trade, transfer, or manage them securely and transparently. Tokenization makes it possible to access and interact with these assets through digital wallets and platforms without the need for traditional intermediaries like banks or brokers.

Here are a few examples of tokenization in the crypto world.

Real estate

You can tokenize a property by creating cryptocurrency tokens that represent a portion of the ownership of that property. This allows multiple people to invest in the property by buying and trading these tokens, making real estate investment more accessible and liquid. For example, in 2021, TechCrunch Founder Michael Arrington's apartment in Kyiv was sold as an NFT.

Art and collectibles

Artists or collectors can tokenize physical or digital artwork by creating non-fungible tokens (NFTs) that represent the ownership and uniqueness of the art piece. This allows the art to be easily bought, sold, or traded on digital platforms. The most expensive tokenized piece of art (as of today) called “The Merge”, was sold for $91.8 million on Nifty Gateway.

Financial assets

Traditional financial assets like stocks, bonds, or commodities can be tokenized to create digital security tokens. These security tokens can be traded on digital platforms, potentially lowering transaction costs and increasing the speed of transfers.

Tokenization in crypto has the potential to revolutionize various industries by making it easier and more efficient to access, trade, and manage assets, rights, and services. By leveraging blockchain technology, tokenization can bring increased transparency, security, and liquidity to these markets.

Difference between coins and tokens

Coins and tokens are both types of cryptocurrencies, but they have some key differences (crypto token vs coin).

What are crypto coins:

  • Coins are digital currencies that have their own separate blockchain.
  • Just like traditional money, coins are mainly used for buying goods and services or storing value.
  • Examples of coins include Bitcoin (BTC), Ethereum (ETH), and Tron (TRX).

What are crypto tokens:

  • Tokens are digital assets that are built on top of an existing blockchain. Most often, they use the Ethereum platform, and they don't have their own separate blockchain.
  • Cryptocurrency tokens can have various purposes, like representing ownership of assets, granting access to services or platform features, or being used as digital collectibles.
  • Examples include USDT (stablecoin, pegged to the value of the US dollar) and SAND (utility Ethereum-based token of Sandbox, used in the game).

In summary, coins and tokens are both types of cryptocurrencies, but they have different purposes and technical foundations. Coins have their own blockchain and are mainly used as digital currencies, while tokens are built on existing blockchains and can represent a variety of assets, rights, or services. However, many people don’t know or ignore the difference and call coins tokens and vice versa.

How to buy crypto coins

Now that you know what are crypto tokens, let's learn how to buy them in a few simple steps:

First, you'll need a digital wallet to store your tokens. There are different types of wallets, such as software wallets (apps or programs) and hardware wallets (physical devices). Some popular software wallets include MetaMask and Trust Wallet.

Next, you'll need to sign up for a platform where you can buy and trade tokens. These platforms are called cryptocurrency exchanges or trading platforms. Make sure to choose a platform that supports the specific token you want to buy. Some popular coins can be bought directly in the wallet, so you don’t even need to create an account on a centralized exchange. For example, today, you can buy more than 75 tokens and coins in 8 chains on MetaMask.

You may start with USDT or USDC. These tokens are the most popular stablecoins, so you can easily exchange them for any other token you need.

After that, you can swap tokens on a decentralized exchange (DEX). WhiteSwap supports lots of cryptocurrency tokens in three blockchain networks: Ethereum, Tron, and Polygon. Here you can easily exchange one coin for another.

Swap tokens on WhiteSwap.

How many tokens are there

According to the Exploding Topics report, the crypto tokens list includes more than 22,904 cryptocurrencies, with a total market capitalization of approximately $1.1 trillion (as for May 2023). Today, there might be much more. New tokens are created regularly, while some older ones may become inactive.

It's important to note that not all crypto tokens are equally popular or valuable. Some tokens, like USDT or LINK, have large market capitalizations and are widely used for various purposes. Thousands of other tokens are smaller, less well-known, and may have limited use cases or communities. Many tokens gain popularity and crypto token price only for a short time due to marketing promotions but quickly lose capitalization due to their worthlessness. Such tokens are called shitcoins.

FAQ about crypto tokens

How to create a crypto token?

To create a crypto token, you need to write a smart contract on a blockchain platform and deploy it. This smart contract defines the token's properties, like its name, supply, and functionality. This requires some programming skills.

How do crypto tokens gain value?

Crypto token price is linked to supply and demand, driven by factors like utility, adoption, scarcity, and market sentiment. As more people use, trade, or invest in a token, its value can increase.

How to burn crypto tokens?

To burn cryptocurrency tokens, you send them to an inaccessible address or use a specific function in the smart contract. This process permanently removes the tokens from circulation, reducing the total supply and potentially increasing the value of the remaining tokens.

How to find new crypto tokens?

To find new crypto tokens, you can explore websites like CoinMarketCap or CoinGecko, follow crypto news sources, or join online communities like forums, Telegram groups, or social media platforms where new projects are discussed.

So, there are tens of thousands of different crypto tokens created on the basis of foreign blockchains for various purposes. The price of tokens is constantly changing, and often they are even more volatile than popular coins. This means that investing in tokens can be very risky, but it can also bring huge profits. You can buy and exchange tokens in the Ethereum, Tron and Polygon networks on the WhiteSwap exchange.

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