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Crypto tokens are digital assets that are built on the blockchain of another cryptocurrency.
Blockchain is a digital ledger that stores information in blocks that are linked. This information can be transaction records or full-fledged programs operating on the blockchain, which are called smart contracts. For example, when cryptocurrency transactions are confirmed, they would be grouped into a block and that block would then be added to the blockchain.
Every cryptocurrency is built on a blockchain. If a cryptocurrency does not have its own blockchain and instead uses another cryptocurrency’s blockchain, then it is considered a token.
A cryptocurrency can be a coin or a token, depending on whether it is a native cryptocurrency for the blockchain itself or not. Crypto coins have their own underlying blockchains; crypto tokens do not.
To make it clearer, let’s use Ethereum as an example. Ethereum is a blockchain and the native cryptocurrency of this blockchain is called Ether. Because Ether has its own blockchain, it is considered a crypto coin.
One of the things that made Ethereum special is that it was the first programmable blockchain. Since it is programmable, developers can use it to launch their own cryptocurrencies. These cryptocurrencies run on Ethereum’s blockchain instead of their own, making them crypto tokens (the official term for tokens built on Ethereum are ERC-20 tokens).
Earlier cryptocurrencies such as Bitcoin did not have this ability. Ethereum did just that, helping it become the second-largest cryptocurrency by market capitalization.
Since it is much easier to create a token than a coin, there are many more scams and lackluster projects launched using tokens. However, this does not mean that all tokens are bad investments or that all coins are good. There are plenty of tokens with interesting use cases. Of course, there are also cryptocurrencies that have no special use cases or competitive advantages.
Tokens allow developers to create a cryptocurrency without having to build a blockchain for that cryptocurrency. This is a big deal because it makes the cryptocurrency development process much faster, easier, and cheaper.
For developers looking to create their own cryptocurrency, blockchain development is a serious technical undertaking. Blockchain must be able to process transactions quickly at a low cost and be resistant to attacks so that hackers cannot steal cryptocurrencies.
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