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“Easy Explanation of Cryptocurrency Token” – Content:
- What are Blockchain Tokens?
- How do Blockchain Tokens work?
- Coins vs Tokens
- Types of Tokens
- Why do we need Blockchain Tokens?
- why do blockchains need tokens?
- Summary
What is a Blockchain Token
A cryptographic token represents rules on a blockchain. Smart Contracts encrypt them. Each token belongs to a blockchain address. With your wallet, you can use your token. That means, only if you have the private key for the address of the token, you can use it. The token makes you the owner.
How does a blockchain token work?
A blockchain token can represent an asset. So if you want to hand over an asset on the blockchain, you only have to sign the token with your private key and send it to the other person. As a result, the ownership of the property has changed.
A token can also represent an access right. So you can get access by signing with your private key. For example, if you want to use software, you only need the token and sign the access with your private key.
Difference between Coins vs Tokens
A coin is an entirely independent blockchain kind of like Bitcoin, Ethereum or Litecoin. So they have their own use-cases, management, and rules.
Thus, a Token exists on top of an existing blockchain. Ethereum, for example, has decentralized applications that exist on top of the blockchain. As a result, you can use tokens as fuel for the network, company shares or otherwise. Therefore you can not only use it as a currency but also for other things. So the ERC20 is an example of a token that works on Ethereum.
Types of Tokens
Utility Token
A Utility Token is a usage token and you can use them as a key to your house. For each house, you need another key to open the lock. The same example applies to the utility tokens. Thus, if you want to run an application on the Ethereum network, you need to create a special utility token to use it.
So Utility Tokens are not designed purely as an investment. But many people use them for that reason. Thus, they hope that the value of tokens will one day increase. Therefore they do not use the service of a utility token at all.
Security Token
A Security Token is like a security paper. Therefore it is a mix between crypto tokens and classic securities. But these tokens have a clear financial motivation. This motivation comes from dividends, revenue shares or rewards.
Equity Token
Equity Tokens are real-life tokens. Something we know from the traditional world will be represented by a token. So for equity tokens, it could be stocks, real estates or cars. Thus, it would be possible to profit from the turnover of a company. You can even obtain a voting right depending on the function of the token. As a result, a common IPO can be replaced.
Why do Blockchains need Tokens?
Blockchains need tokens so that we can make claims in the network, e.g. for valuables.
We also need tokens so that we can represent an investment such as in a company.
In addition, a blockchain needs tokens as a means of payment. Here, there are special currency tokens that simplify payments.
Why do we need Cryptocurrency Token?
With a token, you can apply functions to a blockchain without having to develop your own blockchain. You can develop applications that use the rules and infrastructure of the Ethereum network without creating your own blockchain. So, on the one hand, you save a lot of money. But on the other hand, you are completely dependent on the network. Thus, if the owner of Ethereum decides to close the network, there is no possibility to run your DApp.
“Cryptocurrency Token” – Summarized:
- Coins represent independent blockchain.
- So Tokens exist on top of an existing Coin.
- Thus, with a token, you can apply functions to a blockchain without having to develop your own blockchain.
- There are three types of Tokens: Utility Tokens, Security Tokens, and Equity Tokens.
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