The building of significant crypto tokens is not done on their blockchain. However, all cryptocurrencies belong to a blockchain, primarily a platform storing data that cannot be changed, falsified or replicated.
As such, every cryptocurrency has no blockchain; we call it a token. All crypto tokens and crypto coins exist in their respective blockchains. As we have seen before, a crypto token and a coin have different uses.
How Do Crypto Tokens Work?
The creation of crypto tokens happens through different token standards, most of which are in the Ethereum blockchain. Besides, ERC-20 and ERC-721 are the most common token standards, which serve different purposes.
The ERC-20 token allows users to create tokens compatible with dApps on the Ethereum network, which in turn facilitates interoperability within the blockchain. On the other hand, ERC-721 enables the creation and operation of NFTs, unique crypto assets representing items like art, music, videos, real estate, games, and more.
Tokens are different types, but we focus on what utility tokens are.
What is a Utility Token?
Utility tokens are a distinct category of crypto. Unlike coins and security tokens, utility tokens provide users with dozens of features on blockchains and dApps (decentralized applications). As smart contract blockchains like Ethereum continue to scale, more blockchain developers are issuing unique utility tokens for their Web3 projects.
As such, a utility token is a cryptocurrency on an innovative contract blockchain that serves a specific function in a crypto project's ecosystem. Unlike cryptos like Bitcoin (BTC), utility tokens aren't designed to be a real-world medium of exchange. Instead, a utility token only has a use case within its smart contract protocol.
It is vital to note that the minting of crypto tokens does not happen like Bitcoin or even Litecoin. However, Web3 project leaders "pre-mine" their utility tokens and send them to team members, early investors, and the general public.
Utility tokens can be released from any crypto project on a smart contract blockchain. This, in turn, grants users access to special features. For example, purchasing in-game items can be done using utility tokens.
Primary Uses of Utility Tokens
Voting- Utility tokens give people the right to vote on upcoming improvement proposals on a dApp. While every dApp has different rules for blockchain governance, one of these tokens typically represents one vote.
Gaming- Many blockchain-based games have utility tokens to buy in-game items like NFTs (non-fungible tokens). Also, these utility tokens often serve as a rewards mechanism in play-to-earn games like "Axie Infinity."
Crypto Exchange Perks- Some centralized crypto exchanges (CEXs) like Binance, KuCoin, and Crypto.com offer utility tokens to reward holders with perks like discounted trading rates.
Tipping- Utility tokens may serve as a dApp's built-in tipping mechanism.
Paying Network Fees- People have to pay transaction fees using a smart contract blockchain's native utility token.
Final Thoughts
While investors can buy utility tokens for price speculation, it is not the purpose of these cryptocurrencies. Utility tokens are designed to be used on their respective protocols.
From gaming and voting to tipping and transaction fees, utility tokens should always serve a function in their expanding Web3 ecosystem.
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