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A keener lock into Cryptocurrency Tokens and their Applications
In the last decade, cryptocurrencies have generated widespread interest among investors and the general public as a potentially revolutionary innovation. Not only have perennial investors taken the chance and invested millions of dollars in crypto.
Rather, even conventionally conservative and risk-averse members of the public have also taken a keen interest in cryptocurrencies. For instance, of the 145 million people in the US who have invested in crypto, 107 million of them have done so within the past 24 months. Among the rest of the American population, 46 million more people intend to invest in cryptocurrencies within the next 12 months. So why is the cryptocurrency phenomenon so alluring to both seasoned and novice investors?
To effectively answer this question, one must not only understand how cryptocurrencies work but more importantly, one must know which are the practical, real-life applications of cryptocurrencies.
By now, you’ve probably heard about the Blockchain— one of the most popular technology buzzwords currently besides cryptocurrency and NFTs. If you have, you know that the Blockchain is a secure, decentralized public ledger that keeps an immutable record of data transactions. This distributed ledger is native to the cloud and cannot, therefore, be accessed physically. It is this quality that makes the Blockchain fundamental to the existence, function, and utility of cryptocurrencies.
This is because cryptocurrencies are essentially digital currencies that exist on the Blockchain. The main difference between fiat currencies and cryptocurrencies is that cryptocurrencies are virtual and hence cannot be accessed in any physical form. Because they are primarily based on the Blockchain, cryptocurrencies are also decentralized. Hence, cryptocurrencies are not regulated by any central authority. Rather, cryptocurrencies rely on a trustless system to ensure crypto transactions are completed according to predetermined conditions.
High level security
As earlier mentioned, cryptocurrencies are based on Blockchains. As such, crypto is decentralized and there is no central regulatory authority to enforce trust between users or prevent fraud or theft. However, cryptocurrencies are secured by a sophisticated security system of cryptographic technology. Cryptographic security employs symmetric, asymmetric, and hashing techniques to ensure that transaction data and history on the Blockchain cannot be hacked, altered, or erased.
Cryptography involves the encryption of data from a sender using an algorithm. Data in plain text is converted into ciphertext and then transmitted through an often insecure network to the recipient. Encryption of that data makes it very difficult for unintended recipients to decipher it upon interception. Only until the data reaches the intended recipient is it converted back from ciphertext into plaintext by a private key.
This conversion from ciphertext to plaintext is what is referred to as decryption. Therefore, cryptocurrencies are a secure form of currency on the Blockchain that are extremely difficult for malicious parties to tamper with.
Every crypto enthusiast, investor, or follower has probably come across the word “crypto tokens.” This is because crypto tokens are a vital part of the cryptocurrency universe and serve a crucial purpose. So what exactly are they?
A crypto token is a type of cryptocurrency that exists on a specific Blockchain. Crypto tokens are created by developers who want to create a new cryptocurrency without having to build a new Blockchain from the ground up.
As such, a token is essentially a cryptocurrency that exists on a Blockchain and has its own separate native currency. You can think of the Blockchain as your own personal blog where you publish articles. Even though you are the owner of the platform and the author of the articles posted on it, you can always publish other articles written by guest authors. In this analogy, those articles written by guest writers are what we are referring to as tokens in relation to a Blockchain (in this case your blog.) Therefore, crypto tokens are essential “guest” cryptocurrencies on a particular Blockchain. This is why it is important to never use the terms “coin” and “token” interchangeably as far as cryptocurrency is concerned. Similar to tokens, coins are a type of cryptocurrency. However, a crypto coin is a kind of cryptocurrency that is the native currency of a Blockchain and not a “guest.” For instance, Ethereum is one of the most recognized Blockchains. There are several cryptocurrencies that are based on the Ethereum Blockchain. However, the Blockchain’s native currency is Ether (ETH). This makes Ether a crypto coin while the rest of the cryptocurrencies which include LINK (Chainlink), UNI (Uniswap), and SHIB (Shiba Inu) are Ethereum tokens.
This begs the question: Why do some programmers choose to develop crypto tokens instead of building Blockchains from scratch and then creating native coins for those Blockchains? Some reasons can be attributed to this decision;
- Developing a secure and robust Blockchain is a very hectic process both in terms of technical requirements as well as time and financial resources. Therefore, creating a crypto token is simpler and faster as it eliminates the need to build a new Blockchain.
- Secondly, Blockchain security is to a large extent hinged on the fact that it is a decentralized ledger that is distributed to several computers in a network. For financial transactions to be verified and validated, there has to be a consensus among all the computers in the chain.
As such, the more users in a Blockchain, the more secure the Blockchain becomes. Naturally, a new Blockchain would take a significant amount of time before accumulating many participants.
So it can be in a developer’s best interest to create a crypto token that can leverage a large number of participants and the resultant high-security level of an existing Blockchain network as opposed to creating an entirely new one.
Now that you have a clear idea of what crypto tokens are and how they differ from crypto coins, it is important to know the different types of tokens in existence and how they are used. The following is a comprehensive breakdown of token types and their use cases;
- Currency tokens
Currency tokens are much like regular fiat currencies. This is because they are primarily used to facilitate transactions and payments for the purchases of goods and services both online and offline.
Because they function like conventional currencies, currency tokens can be transferred by one user from their wallet to another user’s digital wallet.
- Utility tokens
Utility tokens are cryptographic tokens that are used in a digital ecosystem to access special products and services on the Blockchain. For instance, the utility token of an NFT game allows participants to purchase various in-game items, avatars, or special features.
In other instances, utility tokens can be used to access special virtual events or to reward Blockchain users for performing certain actions or in the case of games, completing certain challenges or winning competitions.
- Governance tokens
Strictly and technically speaking, governance tokens are a type of utility tokens. However, governance tokens are often categorized separately due to the uniqueness of their functionality on the Blockchain.
Why so? Well, governance tokens grant holders the right to vote on proposals that are floated on decentralized platforms. In a way, governance tokens are enablers of “functional democracy” on the Blockchain as they allow all stakeholders of a DAO (Decentralized Autonomous Organization) to have a say on how a system should be managed.
This system of “on-chain governance” helps to actualize community ownership of Blockchain projects. Therefore, users with more governance tokens get more voting powers on matters concerning a particular dAPP.
- Security tokens
A thorough analysis of the various use cases of NFTs from different literary sources will reveal, among others, that NFTs can be used to represent real-world assets on the Blockchain. In the same way, security tokens are representations of real securities in the stock market.
As such, security tokens can be used to represent different financial instruments including ownership shares and stock options. As part of integrating the Blockchain into their operations, various entities are working on developing security tokens and will in the foreseeable future issue them as proof of ownership stakes.
- Asset tokens
Much like security tokens, asset tokens are digital representations of real-life assets. While security tokens represent stock market securities like shares and bonds, asset tokens back assets in the real world.
These assets can be everything from gold and diamond to real estate and oil. By providing digitized proof of asset ownership, asset tokens provide users with higher convertibility and transferability of assets.
The effect of volatility on crypto investor behavior
A keen observation of the developments in payment systems and finance over the ages reveals one fact; while it may take some time to fully streamline it, cryptocurrency is the future of money. This is because fiat money has several limitations that cryptocurrencies and the Blockchain can help solve. However, there is one major factor in the field of cryptocurrency that has been a cause of concern for many; volatility.
Since their inception, crypto markets have been plagued by frequent price fluctuations. For instance, Bitcoin has recorded highs of up to $68,000 in 2021 and hit lows of up to $23,000 in June 2022. Therefore, while cryptocurrencies may be lucrative tradable assets, their volatility sometimes scares off prospective investors. But what exactly causes this volatility? And should investors write cryptocurrencies off completely because of it? Cryptocurrency volatility is primarily the result of the novelty of crypto as an asset class and as a medium of exchange. Depending on various developments in Blockchain and the macroeconomic environment, confidence levels in crypto vary.
For instance, when a nation bans the use of cryptocurrency as a medium of exchange within its borders, investors are likely to react in a manner that displays low confidence. This leads to a drop in the price.
Investor confidence can also drop due to other factors such as the hacking of crypto wallets and major crypto heists. However, the main trigger of crypto volatility is its speculative nature. The implication? Volatility can adversely affect investors in the sense that ill-timed investments can result in losses. However, volatility can be managed by strategic timing and investing.
Therefore, people interested in cryptocurrencies should invest more time to acquire knowledge and understanding of how the markets operate. With time, the market volatility will stabilize and the price fluctuations will even out.
Utility a strong case for large scale adoption of cryptocurrencies
Cryptocurrencies are a relatively new asset class and medium of peer-to-peer transactions. Therefore, crypto wields a lot of potential to revolutionise financial transactions as we know them. By leveraging Blockchain technologies, cryptocurrencies will help the world to transition to a faster, easier, and more secure way of storing and transferring value without the need for third-party intermediaries.
As such, we should all take the initiative to learn as much as we can about cryptocurrencies and establish how we can gainfully employ crypto to optimize our operations.