What Do Tokens Represent in the Crypto World?
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It is very hard to ignore the rise of bitcoin and other cryptocurrencies this year. Cryptocurrencies have achieved much recognition and attention this year, with their underlying technology blockchain behind their amazing rise.
- To replicate financial markets, the crypto markets now have features that resemble the stock market. One of such features is the initial coins offering ICO.
- Coins are cryptos that can be used as a medium of exchanges and are built on their blockchain.
- Tokens, on the other hand, represent a particular asset or utility and is usually found on another blockchain.
What are Cryptocurrencies?
- Before you understand what coins and tokens are, you will need to understand what cryptocurrencies are. They are digital or virtual currencies that are secured with cryptography.
- This cryptography is used to secure and verify transactions made using these cryptos.
- The first decentralized cryptocurrency to emerge was bitcoin, a cryptocurrency that is powered by a public ledger that records and validates all transactions chronologically, called the Blockchain.
What are coins?
- Before we venture further, it is important that you know both coins and tokens are cryptocurrencies.
- The major difference is that coins do not function as a currency or medium of exchange.
- Coins are cryptocurrencies that are treated like commodities because they are not used as currencies.
What are Tokens?
- Tokens are cryptocurrencies that represent a particular asset or utility and is usually found on another blockchain.
- To define it, a token is an asset that is fungible and can be traded. They include commodities, cryptocurrencies, loyalty points and others.
- Tokens became popular because creating them is a much easier process. There is no need for you to modify the codes from a particular protocol or create a blockchain from scratch.
- Token creators are only allowed to follow a standard template on the blockchain, with the most popular one used being that of ethereum.
- Creating tokens has been made possible and easy via the use of smart contracts. These are programmable computer codes that execute themselves with no third party needed.
- These tokes are created and distributed to the public through a process called the Initial Coin Offering (ICO), which is a form of crowdfunding, with the resulting money used to fund a project.
What are coin tokens?
- Coins tokens are the cryptocurrencies that are used for most tokens. The most popular cryptocurrency used tokens during ICOs is ethereum.
- Ethereum is chosen due to its unique and amazing blockchain technology.
What is the difference between coins and tokens?
Since coins and tokens are usually cryptocurrencies, what is the difference between them?
- The first point to note is that coins do not function as currency or act as a medium of exchange. Tokens, on the other hand, are used for both functions.
- Coins are all cryptocurrencies while tokens include other things like commodities, loyalty points, and others.
- Tokens are used for initial coins offering ICOs while coins aren’t used for that. The money raised from ICOs are used to fund projects.
- Tokens are found on another blockchain, most especially ethereum while coins are designed with their blockchain.
Types of tokens
There are different types of tokens. Let us have a look at them.
Utility coins give users the freedom to do several things. Ethereum is the first and leading major utility token in the world. Ethereum is a currency token as it can be used to exchange value. The cryptocurrency uses its utility to solve the problems that all currency tokens face.
In some quarters, utility tokens are called “Network Access Tokens.” These class of tokens gives the users access to functions that the network carries out.
This is a type of token that is represented by an asset. They are currently one of the largest areas of growth. This can be attributed to their ability to enable true distributed, P2P ecosystems on the blockchain. They are however not popular with investors.
This type of tokens is usually avoided by traders and investor due to sanctions by Security Exchange Commission SEC. Despite that, equity tokens are very appealing to investors because they represent ownership and control, unlike the other tokens. The equity tokens function similar to a traditional stock. Equity tokens purchases for you a certain level of ownership of a company or an organization and its success. Some people also avoid equity tokens due to their complex rules.
Reputation and Reward Tokens
These are a special type of tokens in the sense that they are given as a symbol of reputation or as rewards. Both of them are ways of telling a blockchain that a certain user or wallet did something remarkable or is someone special. They aren’t popular because some of them aren’t tradable. The only real value of reputation or reward tokens is that the bearer is someone that can be trusted.
All about ‘Initial Coin Offering (ICO)’
- The crypto world operates decentralized and isn’t regulated by any central body. This feature cuts across all its sectors, including initial coin offering.
- ICO also called an Initial Public Coin Offering (IPCO) is an unregulated method of raising funds for a new cryptocurrency or blockchain project. This is usually used by startups just like initial public offering IPO for stocks.
- ICO allows crypto startups to bypass the normally tedious and regulated fundraising procedures required by some financial institutions and banks. During an ICO, a certain percentage of the cryptocurrency is sold to investors of the project, with the investors paying for that percentage using traditional currencies or other cryptocurrencies, mostly ethereum.
- When a crypto startup firms are looking to raise money via ICO, the first step is for them to create a plan on a whitepaper which gives details of their project. During the ICO campaign, investors and supporters of the company purchase some of the distributed crypto coins with fiat or other cryptocurrencies.
- These coins are what we described earlier as tokens and work the same way shares of a company are sold to investors during an If the money raised from the ICO doesn’t meet what the company estimated, then it would be returned to the investors, and the ICO considered as unsuccessful.
- If the required funds are raised, however, then the money would be used by the company for the project they designed it for.
- Investors usually purchase the tokens with the hope that a project would become successful when launched. This will ultimately translate into a higher crypto coins value than what they purchased it for before the project was initiated
- ICOs work in similar fashion to IPOs and crowdfunding. A share of a startup company is sold to investors to raise funds required to run projects in the company. The difference though is that IPOS deals with real investors while ICOs are funded by supporters of a new project. In that regard, they are similar to crowdfunding.
- Supporters of ICOs though expect an ROI unlike that of crowdfunding where donations are made without the prospect of profits. Investors though are advised by regulators to be wary of some ICOs as some of them are fraudulent. Since they are not regulated, financial authorities like the SEC and FDIC do not insure them, thus any money lost cannot be reimbursed.
How to partake in an ICO
- To take part in an ICO. You will need to identify the ICO you want to support. Go to their platform and register.
- Payments for the tokens are usually made with certain coins or fiat currency, the most used coin is Ether.
- After purchasing the number of tokens you wish to purchase using Ether or any other currency, you will be given the equivalent tokens you paid for.
in a nutshell
Initial coin offering is an integral part of the crypto world. Traders and investors are making a profit by investing in new and hot ICOs every year, and you can be a part of that. To get more information about anything cryptocurrencies and blockchains, check our website for other posts. Thank you for reading