The term “token” is widely used in the world of cryptocurrencies. You might even hear Bitcoin described as a “crypto token” or something similar, since, in principle, all crypto assets can be referred to as tokens. However, over time, the word has taken on two more specific meanings that are commonly used and worth understanding.
In one sense, a “token” often refers to any cryptocurrency other than Bitcoin and Ethereum—even though both of these technically qualify as tokens as well. Because Bitcoin and Ethereum are by far the two largest cryptocurrencies, it is useful to have a term that collectively describes the rest of the market. Another term with a similar meaning that you may encounter is “altcoin.”
The second, increasingly common meaning of “token” is more specific. It refers to crypto assets that operate on the blockchain of another cryptocurrency. You will frequently come across this definition when exploring decentralized finance (DeFi). Unlike Bitcoin, which runs on its own dedicated blockchain, many DeFi tokens—such as Chainlink or Aave—are built on top of existing blockchains, most commonly Ethereum.
These tokens enable decentralized applications (dApps) to perform a wide range of functions, from automating rewards to facilitating the sale of virtual real estate. Like any other cryptocurrency, they can also be traded or held as investments.
Why are tokens important?
Since you will encounter this term frequently when researching cryptocurrencies, it is helpful to understand its most common meanings. Beyond the general definitions above, there are also specific categories of crypto assets that are explicitly referred to as “tokens.” Here are some key examples:
DeFi Tokens In recent years, a new ecosystem of blockchain-based protocols has emerged with the goal of replicating traditional financial services such as lending, saving, insurance, and trading. These protocols issue tokens that serve various functions within their systems, while also being tradable or storable like any other cryptocurrency.
Governance Tokens These are a specialized type of DeFi token that allow holders to participate in decision-making processes. Since decentralized protocols do not have central authorities or management boards, governance tokens give users a voice in shaping the future of a platform. For example, the Compound protocol issues a token called COMP, which allows holders to vote on proposed updates and changes. The more COMP tokens you own, the greater your voting power.
Non-Fungible Tokens (NFTs) NFTs represent ownership of unique digital or real-world assets. They can be used to make digital content harder to duplicate or distribute without authorization—an issue familiar to anyone who has encountered pirated media online. NFTs are also commonly used to issue limited-edition digital artworks or to sell unique virtual items, such as rare in-game assets.
Security Tokens Security tokens are a newer class of digital assets designed to represent traditional financial securities like stocks or bonds. They are often used to sell ownership shares in companies or assets such as real estate—similar to how shares are traded in traditional markets, but without requiring intermediaries like brokers. There are growing indications that both startups and large corporations are exploring security tokens as an alternative method of raising capital.
