People can buy, sell, and use over 20,000 different cryptocurrencies, and most of these are crypto tokens rather than coins. The distinction comes down to the creation of the crypto and whether the developer built a brand-new blockchain and native currency, which is a coin, or added a new crypto to an existing blockchain, which is a token.
What is a crypto token?
A crypto token is a type of cryptocurrency that’s built on top of an existing blockchain. These tokens can have various purposes, from allowing someone to pay for a crypto project’s services to giving the holder special rights, such as the ability to vote on the future of a project.
Blockchains are the online databases that permanently record transactions, and they’re the technology underpinning cryptocurrencies. Each blockchain can have different features.
For example, the Ethereum blockchain works like a supercomputer that people can use to run various apps. This distinguishes it from Bitcoin, which has a blockchain that primarily exists to record Bitcoin transactions and balances. Both of these blockchains have native crypto coins—Ether and Bitcoin, respectively—but they’re run completely separately.
Rather than building and managing a new blockchain, some developers create crypto projects as part of an existing chain. They can then focus on their core interest, ideally add to existing projects, and they’ll also have a built-in audience of people who use the blockchain. The cryptocurrencies that accompany these projects are called crypto tokens.
Some blockchains make it easy for people to develop and launch new tokens, as a growing ecosystem of interesting and useful projects can attract new users. For instance, many people have created tokens on Ethereum using the ERC-20 token standards, which allows the tokens to interact with a wide range of other Ethereum-based apps.
Types of crypto tokens
Technically, every cryptocurrency is a token. But the crypto lexicon is always in flux, and the language evolved as Bitcoin, Ethereum, and other cryptos gained prominence. As of mid-2022, many people refer to a blockchain’s main token as its native crypto or a crypto coin. The name distinguishes it from any non-native cryptos, or crypto tokens, that are built on the same platform.
Confusingly, some people may also use “crypto token” when discussing less-common cryptos, even if the token is the native crypto of a blockchain. And some names that don’t align with the convention stick. For example, “coin” is part of the name for meme coins, scamcoins, and stablecoins (types of crypto), even though many of these are tokens.
Some of the common types of crypto tokens—meaning, non-native cryptos—include:
- Equity tokens. An equity or security token is created and offered as investment opportunities—in this case, security refers to a type of investment rather than something being safe. They may be similar to buying stock in a public company, which gives the holder equity in the company. The Arca Lab’s Arca U.S. Treasury Fund has an equity token, which represents a share of the fund, called ArCoin.
- Governance tokens. Some crypto projects, including decentralized autonomous organizations (DOAs) and decentralized finance (DeFi) apps, issue governance tokens to create a democracy-like ownership structure. For example, people who own the Curve Finance CRV token can use their tokens to vote on proposals that change how the crypto exchange works.
- Meme coins. Developers might launch a meme coin as a type of crypto token. These tokens are largely jokes that play off a pop culture reference. In a few cases, such as Shiba Inu, the tokens became popular enough for their prices to significantly rise.
- Non-fungible tokens. Many crypto tokens are fungible, meaning they’re equal in value to one another, just like a dollar. However, non-fungible tokens (NFTs) are unique tokens. People can use NFTs in different ways, but they’re most often used to represent ownership of digital art.
- Scamcoins. Some scammers create crypto coins or tokens to steal money. The scam might be built into the token itself. That was the case with the Squid Game (SQUID) token, which many holders found they couldn’t sell. Fraudsters may also list a scamcoin on a decentralized crypto exchange and then promote (and pay others to promote) the token. If its value increases, they’ll exchange their tokens for a different crypto and abandon the project, a type of scam called a “rug pull.”
- Stablecoins. A stablecoin is a crypto coin or token that’s designed to have a fixed exchange rate, often with a dollar. Investors can use stablecoins to keep money on a blockchain while limiting their volatility risk. At least, that’s the idea. But it doesn’t always work out, which holders of the TerraUSD (UST) stablecoin found out when the coin crashed in mid-2022 and wound up being worth less than a cent instead of $1. Other popular stablecoins, such as DAI and USDC, are tokens.
- Utility tokens. Utility tokens have some sort of functionality associated with them—often, holders can spend the tokens to pay for a crypto project’s services. For example, the CUBE crypto token on Ethereum lets people buy virtual assets in and interact with the Somnium Space metaverse.
This isn’t an exhaustive crypto tokens list, and some people use alternative terms for the same crypto tokens. But it covers some of the most common types of crypto tokens that investors may encounter.
Crypto tokens vs coins: similarities and differences
While crypto coins are technically a type of crypto token, the two terms generally refer to different types of digital assets. Here are some of the commonalities and differences between crypto coins and tokens:
- How they’re similar: Crypto coins and tokens are both part of a blockchain—a digital ledger that’s often run by a decentralized network of computers.
- How they’re different: Tokens are added to an existing blockchain whereas coins are the native coin created for a new blockchain.
- How they’re similar: Crypto coins and tokens can be used in similar ways, such as paying for transaction fees on a network or as a type of investment.
- How they’re different: Crypto tokens may have a variety of uses that go beyond basic governance or payments, such as conveying ownership, creating less-volatile cryptos, and representing ownership of real-world assets.
- How they’re similar: Investing in crypto can be risky regardless of whether the asset is a coin or token. Both types of assets often experience large price swings. Scammers can also create and promote both coins and tokens.
Tokens before crypto
There are many examples of tokens as a means of economic exchange throughout history, including current examples outside the crypto universe.
An arcade or laundromat might require someone to exchange dollars for store-specific tokens that they could use to play a game or wash their clothes. Each token can be exchanged for a service, and someone who buys too many might be able to sell them to other people at the arcade or laundromat.
Tokens also existed in digital realms before cryptocurrencies. For example, some games have in-game currencies that players could spend in the game or try to sell for real-world currencies. But Bitcoin was launched in 2009 as one of the first digital tokens that explicitly wanted to function as a new type of currency.
The bottom line
Developers can launch a crypto token to build on top of an existing blockchain’s features and popularity. By tapping into the established system, the developers can focus on creating, promoting, and updating their project and token rather than starting from scratch.