The term token is very common with cryptocurrency. In fact, you often hear that Bitcoin is described as a “crypto token” or something which is a lot similar to it because all crypto assets can be described as tokens. But this word has taken specific meanings that are so common that the chances of you coming across it are high.
What Are Crypto Tokens?
A crypto token is mainly a representation of interest or an asset that has already been tokenized on existing crypto’s blockchain. Cryptocurrencies and tokens share a lot of similarities. But cryptocurrencies are mainly used as a medium for exchange, a measure, a means of payment, and a store of value.
Crypto tokens are mostly used for raising funds for projects. They are mainly formed, distributed, then sold, and circulated through the process of initial coin offering or ICO, which involves a crowdfunding round.
History Of Crypto Tokens
Even though there were cryptocurrencies that forked from Ethereum and Bitcoin before the ICO boom in 2017, the first recognized token and ICO was Mastercoin. J.R. Willet created it and announced it in January 2012 through the Bitcoin Forum. He titled the paper “The Second Bitcoin Whitepaper.”
Mastercoin was one of those first projects that described using layers to enhance the functionality of the cryptocurrencies. The project also linked the value of Mastercoin to the value of Bitcoin. It also explained how the project would be using funds to pay the developers to create a way that would help users make new coins from the Master coins.
The ICO Boom
Between the years 2012 and 2016, the creation of crypto tokens and ICOs increased. By the year 2017, the token offerings went sky high as the investors became more aware of them. Along with the increase in the value that they promised. Businesses, scammers, and developers started creating tokens rapidly and tried to take advantage of the fundraising that was going on. This increased so much that the regulatory agencies started issuing alerts to the investors and warned them about the risks ICOs had.
After The Bubble
The bubble of ICO burst in 2018 after IEO, or the initial exchange offerings, came to place. Now, exchanges happened with offering tokens. Exchanges happened to increase the token offerings and reduce the risks to investors. However, scammers kept using the exchanges to promote their scams.
Regulatory authorities started issuing alerts for the investors and informed them about the risks that are involved in participating with an IEO. They even mentioned that the exchanges need to register with the authorities if they are facilitating the fund-raising efforts. The logic behind this is that the exchanges may be acting as some alternative trading system or dealers, which, according to the law, needs registering.
Crypto tokens are still created and mostly used for raising funds through ICOs. Whitepapers read, such as pitchbooks, outline the purpose of the token. They mention how it would be sold. How it would be used, and ultimately, how it would benefit the investors.
How Crypto Tokens Work
Crypto refers to the different cryptographic techniques and encryption algorithms that protect these entries. Like public-private key pairs, elliptical curve encryption, and hashing functions. On the other hand, cryptocurrencies are systems that allow secure online payments.
Crypto tokens are often used as transactional units on blockchains. They are formed with the use of standard templates similar to the Ethereum network, which lets the user create tokens. However, these blockchains work with the concept of smart contracts or decentralized apps. Here, the self-executing programmable codes are used to manage and process the different transactions that happen.
For instance, you might get a crypto token that represents a particular number of customer points on a blockchain. This manages the details of the retail chain. Any other crypto token might give the token holder the right to view streaming content for 10 hours on any video-sharing blockchain. However, a token has the capability of representing other cryptos, like the tokens equalling 15 bitcoins on a blockchain. Moreover, these crypto tokens are transferable and tradable among other participants of the blockchain.
Investors can make use of these tokens for numerous reasons. They can hold them for representing a stake in any crypto company or for any other economic reason, like purchasing or trading any services or goods.
Concerns About Crypto Tokens
The most important concern about thes crypto tokens is that, as they are mostly used for raising funds, scammers often use them to steal money from investors. However, it is difficult to make the difference between the real and the scam token.
Here are a few factors to watch out for when you are looking at a crypto token:
- Based on the jurisdiction, there would be a requirement for the token to get registered. The Howey Test is used by the SEC to check if the asset has security. If there is a need to register, but it is not, that means the current form is not legal.
- Check the team in their background and the team that is behind the ICO. Determined if that is a legitimate business and check the address as well as the phone numbers. Check the website of the Secretary of State for the state they are claiming to have registered in and look for them. If you cannot find any information about them other than the white paper and their custom website, that means it could be a scam.
- ICOs other than the U.S. could be a little difficult to find. One of those tokens is BananaCoin, which was issued in Laos to raise funds for banana plantations. Investors were informed that they could exchange the tokens for an equal value of funds or bananas after the launch.
- Many of the tokens are listed on non-regulated exchanges and outside of the U.S. If it is not listed on any regulated exchange, the chances of that being a scam are really high.
- Even the tokens that are listed on registered exchanges can turn out to be scams.
What Is the Function of Tokens?
Crypto tokens are mainly used for making transactions on the blockchain. But they can also represent the stake an investor holds in a company or for any economic purpose, a lot like legal tender. This actually means that the token holders can purchase or make trades with the help of these tokens, like any other securities, to make a profit.