Blockchain technology has been gaining momentum in all industries because of its decentralized nature. Organizations are looking for ways to incorporate blockchain applications in decentralized applications or create smart contracts. Blockchain is famous for its various forms of cryptocurrency, such as Bitcoin, Ethereum, etc.
Another popular aspect of blockchain is tokens; however, not many are familiar with the idea of fungible and non-fungible tokens. Since non-fungible tokens are considered the future of the blockchain economy, it is crucial to differentiate among them. This article will dive into what tokens are, their importance, and the difference between fungible and non-fungible tokens.
Blockchain tokens are sometimes referred to as digital coins, which is incorrect. Blockchain tokens are very different from coins. Coins are native to their blockchain and are often used as money. Tokens are built on top of other blockchains created for decentralized applications, and therefore their purpose changes according to the dApps. Let us understand blockchain tokens in detail.
As stated above, tokens or crypto tokens are built by platforms on existing blockchains networks, and they are based on smart contracts. One such famous and common blockchain token platform is Ethereum; common tokens built on the Ethereum platform are ERC-20 tokens and ERC-721 tokens. A feature of tokens is that any individual can create custom tokens on any of the blockchain platforms.
Crypto tokens signify a tradable asset or utility placed on its blockchain and allow the owner to use it for investment or other economic purposes. It can be used for trading purposes and also as a form of currency. Crypto tokens are also used to raise funds for crowd sales and other things as a substitute. These tokens are developed, exchanged, and distributed through the standard Initial Coin Offering (ICO) process, which helps fund project development. They are also used to represent an investor’s stake in the organization.
The Different Types of Tokens
There are different types of blockchain tokens. Some of them are:
1. Security Tokens
Security tokens, also known as asset tokens, are issued by ICO (Initial Coin Offering). It represents ownership of real-world assets such as traditional stocks or bonds. Security tokens use a decentralized database system of blockchain to keep track of their assets’ ownership.
Security tokens allow customers to access multiple investments and different tokens represent equity, dent, or real estate according to where and how they are used.
2. Transactional Tokens
Transactional tokens are used in the exchange of goods or services and usually function like standard currencies. However, some transactional tokens are used to implement the immutable nature of blockchain technology and smart contracts in the supply chain and other industries.
3. Equity Tokens
When a token is used to represent stock or equity in an organization that issues it, it is known as an equity token. The traditional stock asset allows the holder to possess the ownership of investments. It also represents how much percentage they own.
4. Utility Tokens
Also known as application tokens, utility tokens provide owners with access to specific products and services. These tokens can be used on platforms to avail special favors or treatment to services. Most tokens gain more value due to their limited supply. Unlike security tokens, utility tokens are not used for direct investment. They account for the most percentage of tokens issued by ICOs.
Importance of Tokens
- Tokens are required for users to access decentralized applications and act to enter into blockchain-based applications.
- Tokens provide the owner with the authority to hold specific voting rights, such as blocking creators.
- Blockchain tokens help their owners to improve their user experience. These tokens act as entities in improving the user experience of a particular environment that falls under the defined boundaries.
- Tokens have traditionally been used as a value of exchange while trading inside the blockchain ecosystem. They behave as a storage of value for transactions and represent a monetary system. The value exchange tokens play an essential role in defining fungible and non-fungible tokens.
- Entity tokens act as a pointer to provide the ownership of unique entities to its owner. These tokens represent the ownership of something special and particular, which lays the foundation of fungible and non-fungible tokens.
Fungible tokens are interchangeable with any asset or entity of the same value. These tokens are widely used as a monetary value and are exchanged as currencies. A $10 bill would hold the same value for the owner and the person he trades it with, and in the same way, two $5 bills would add up to be the exact value as one $10 bill. Similarly, the value of the fungible token is the same for the owner and for the individual with whom it is traded.
Fungibility is scripted in the code of Bitcoin and other such cryptocurrencies. A fungible asset has a particular value set, and therefore they don’t possess unique values. Unique information cannot be written on a fungible token. They have commonly used blockchain tokens and are interchangeable with each other. However, exchanging fungible tokens does no hold any meaning since they are of the same value. These tokens are majorly used to make payments and tracking balances.
Fungible tokens use ERC-20, where ERC stands for ‘Ethereum Request for Comment.’ ERC-20 is a specific set of rules and a specific standard for all smart contracts on the Ethereum platform for implementing a token. These blockchain-based assets contain the value that can be used for transactions and are issued on the Ethereum network. ERC-20 defines a set of functionality issues that explain the procedure used to transfer these tokens and the process of accessing data related to particular tokens. It acts similarly for Ether, Bitcoin, and Bitcoin Cash.
Crypto tokens that hold data instead of a value and are unique are called non-fungible tokens (NFTs). Two NFTs cannot have the same value. These tokens do not inherit any value, and hence they differ from cryptocurrencies. Non-fungible tokens get their value from the asset or entity represented by them. The significant advantage of NFTs is that it lets the owner define the possession of unique entities. It even enables the owner to tokenize assets such as real estate, collectibles, etc. Non-fungible tokens are owned by a single individual at any instance of time and are secured through blockchain’s Ethereum platform.