The technical and traditional definition of a "token" in blockchain and cryptocurrency has been as another word for "cryptocurrency" or "cryptoasset." But as the blockchain ecosystem and use cases have increased, the word token has taken on more meanings and could be better considered as an umbrella term to describe digital assets that run on its own blockchain and digital assets that run on top of another cryptocurrency's blockchain. This gives tokens a more extensive range of potential functions, such as governance, video game items, and identification vehicles. But all tokens can be traded or held.
Cryptocurrency tokens can be differentiated from digital assets, although some definitions include tokens and digital assets as a single definition. Even in these definitions, tokens are typically seen as a subcategory of a digital asset because a digital asset can be broadly understood as a non-tangible asset created, traded, and stored in digital format, which includes, in a blockchain context, cryptocurrency coins and tokens. In that way, a token is a more specific unit of value developed on top of blockchain networks and often shares compatibility with the cryptocurrency coins of the network. Put simply, all cryptocurrency coins and tokens are digital assets, but not all digital assets are cryptocurrency coins or tokens.
Tokens are typically described in terms of their standards, with widely used token standards—including the ERC-20 token standard, which allows the creation of tokens on Ethereum's ecosystem of decentralized apps. And ERC-721, which was designed to create non-fungible tokens that are individually unique and cannot be interchanged with similar tokens.
Tokens are programmable, permissionless, trustless, and transparent. This means tokens are meant to run on software protocols, composed of smart contracts, which outline the features and functions of the token as well as the network's rules of engagement. Permissionless describes the ability for anyone to participate in the system, and trustless describes the lack of one central authority offering control over a system. Instead, the token and the blockchain run on rules predefined in the network protocol. And transparency implies that the rules of the token are viewable, verifiable, and followed.
The differentiation between a cryptocurrency token and a cryptocurrency coin is perhaps simpler. Although cryptocurrency coins have historically been understood to be cryptocurrency tokens, they have been differentiated with the expansion of the roles of cryptocurrency tokens and the more limited role cryptocurrency coins continue to inhabit.
In this expanded context, cryptocurrency coins are considered a native asset of a blockchain network that can be traded, used as a medium of exchange, and used as a store of value. A coin is issued by the blockchain protocol on which it runs, and this is why it is referred to as that network's native currency. In this way, coins can be used to pay transaction fees and to incentivize users to keep a network secure.
Coins are also used to exchange value, allowing a coin holder to exchange the coin for goods or services, hold it for increased value (if the coin's native network increases in value), or exchange it for a fiat currency. Typically, a coin is decentralized and relies on code (smart contracts) to manage issuance and transactions; it is built on a blockchain and is used to enforce the rules of the system in an automated and trustless fashion; and it is secured using cryptography to further secure the underlying network.
Tokens can be used in various ways, unlike coins, which have a fixed use case. Tokens can be held for value, traded, staked to earn interest, and used with decentralized applications (dApps). Often, even though a token may be built on top of a blockchain, like Ethereum, the token will only be capable of being used on dApps or DeFi projects built on the same blockchain, with limited interoperability between blockchains.
For example, an ERC-20 token will be used mostly with other DeFi projects and dApps built on the Ethereum blockchain but cannot be used in place of the Ether coin, which is the native cryptocurrency coin of the Ethereum blockchain used for staking and governance.
Tokens are often thought of as being easier to develop than coins, and their use cases have grown in part due to this and due to their use in DeFi organizations; for example, they have seen increasing application as non-fungible tokens (NFTs) used in open markets or in video games, and they have been used for security or identity tokens, issued to verify users. From this has grown a large group of other types of tokens:
Types of cryptocurrency tokens
As more enterprises wade into the world of cryptocurrency and blockchain, and as the possibilities of blockchain technology, DeFi, and dApps continue to grow, the potential use cases for tokens continue to be discovered or developed. Some use cases include:
