Many people confuse the term ‘token’ with digital coins. However, that is not correct as tokens and digital coins are completely different. Tokens are created on blockchains and Ethereum is the most common blockchain token platform. The facilitation and creation of smart contracts enable the creation of tokens. There are different names for tokens, like those built on Ethereum platforms are known as ERC-20 tokens.
These crypto tokens are also called crypto-assets sometimes and are a special virtual currency that resides in their own blockchain as mentioned above. They represent a utility or asset and are mostly used to fundraise for a crowd sale. However, they can also play the role of a substitute for other things.
Example of Tokens
There are various uses and examples for tokens. A crypto token can be used to represent the number of loyalty points of a customer on a blockchain that is used to manage the details for a retail chain. Another use of crypto token can be to give entitlement to the token holder to view 10 hours of streaming content on some video sharing blockchain.
Similarly, a crypto token can be used to represent other cryptocurrencies. For instance, one crypto token can be stated equal to 15 bitcoin on some blockchain. Thus, these tokens are transferable and tradable amongst the different participants of a blockchain.
How are Tokens Created?
The technicality involved in the creation of crypto tokens is not so intense, but it is not recommended that beginners try to create tokens. On the other hand, if you have some prior experience in programming then it won’t require much time. The developer will have to spend some native currencies on the blockchain when the token is being created.
For instance, if the developer is making a token on the Ethereum blockchain then he/she will have to spend some Ether so that the network miners can validate the token transaction or creation.
A point to highlight here is that there is a fess that will be applicable on all the token transactions on a blockchain, not just the creation of a token. Thus, if you are building any application of Ethereum then you must use the Ether coins for transferring the application (specific tokens sent from respective users to another or between the applications and users).
The Purpose of Tokens
Most of the tokens are used within decentralized applications that are sometimes also referred to as dApps. When developers create a token, they decide how many units will be made and where these tokens will be sent when they are created. At this point, the developers pay some native currency on the blockchain where they are creating the token as mentioned above.
Once the tokens are created they are used for various purposes (some of these are mentioned in the above heading of examples). One of the most prominent ways in which the tokens are used is to activate the features of the application that they are designed for.
For instance, Musicoin is a token that allows users to access the different features of its platform like streaming a song or watching a movie. Similarly, we have another example of Binance that is a cryptocurrency exchange that has its own tokens. When the user trades with BNB then their transaction fees are 50% reduced.
Sometimes tokens are used to represent a physical entity. When you want to sell your house using a smart contract, you use a token that represents your house.
The major difference between a coin and a token is that coins are native to their blockchain. They can be traded on platforms like news spy. However, tokens are built on top of another blockchain.