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Following\"Token\" is a word you often hear in cryptocurrencies. In fact, you may hear Bitcoin referred to as a \"cryptocurrency\" or similar term, because technically all cryptocurrency assets can also be called tokens. However, the word increasingly has two very common specific meanings that you have probably encountered before.
\"Token\" generally refers to any cryptocurrency other than Bitcoin and Ethereum (both are technically tokens). Since Bitcoin and Ethereum are by far the two largest cryptocurrencies, it\'s very helpful to use one word to refer to all other currencies. (Another word you may hear with almost the same meaning is \"altecoin.\")
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Another increasingly common meaning of \"token\" has an even more specific meaning, which is to describe cryptocurrency assets running on a blockchain of another cryptocurrency. If you are interested in decentralized finance (or DeFi), you will encounter this usage. Although cryptocurrencies such as Bitcoin have their own dedicated blockchains, DeFi tokens like Chainlink and Aave need to run on top of existing blockchains (the most common being Ethereum) or leverage these blockchains.
The second category of tokens helps decentralized applications do everything from automating interest rates to selling virtual real estate, but they can also be held or traded like any other cryptocurrency.
Why are tokens important?
Since you will encounter this term often when studying cryptocurrencies, it is important to understand some common meanings. However, in addition to the brief definitions above, there are some categories of cryptocurrency assets that actually carry the word \"token\" in their names. Here are some examples:
DeFi Tokens In recent years, a series of new cryptocurrency-based protocols have emerged that aim to replicate traditional financial system functions (lending, savings, insurance, transactions). Tokens issued under these agreements perform various functions, but can also be traded or held like any other cryptocurrency.
Governance Tokens These are dedicated DeFi tokens that allow holders to vote on the future direction of agreements or applications that (due to their decentralized nature) do not have a board of directors or any other central authority. For example, Compound, the popular savings agreement, issues a token called COMP to all users. The token allows holders to vote on how Compound will be upgraded. The more COMP tokens you have, the more votes you will receive.
Non-homogeneous Tokens (NFT) NFT represents ownership of unique digital or real-world assets. They can make it more difficult to copy and share digital works (a problem anyone who has ever visited a Torrent site full of the latest movies and video games will understand). They are also used to distribute a limited number of digital art or sell unique virtual assets such as rare props for video games.
Security tokens are a new type of asset designed to become a cryptographic alternative to traditional securities such as stocks and bonds. Their main use is to sell shares in companies (very similar to shares sold through the regular market or sporadic shares) or shares in other businesses (such as real estate) without the need for a broker. Large companies and startups are reportedly exploring security tokens as potential alternatives to other fundraising methods.
