Background knowledge on blockchain tokens
In this article, we will further go into the different types of tokens on blockchains. We want to offer you technically flawless information. Therefore, we go a little deeper into technical detail in some cases.
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What are fungible tokens?
In the context of blockchains, a token is a digital item that you can own. A token usually has a specific function and value. Many tokens are intended as a store of value, a medium of exchange and a unit of account – in other words, they represent digital money(payment tokens, e.g. USDT). In addition, there are tokens that can be used for voting (governance tokens, e.g. UNI), that represent the function of securities(security tokens) or digital vouchers that entitle their holders to some kind of access on a platform or to a service(utility tokens, e.g. GRT). Many other use cases (such as social tokens) exist or may be under development. All these tokens have in common that they are fungible, i.e. interchangeable. A USDT has the same properties and value as another USDT.
The second largest blockchain in the world after Bitcoin is called Ethereum . Most tokens are offered there. This is done throughsmart contracts, which are nothing more than executable computer programs on the blockchain. The EIP-20 standard (also known as ERC-20) has become widely accepted. The tokens only exist within the contract, which is like a self-contained database.
The contract specifies the rules for the tokens (i.e. name, symbol, divisibility, rules for transfer, etc.) and maintains a list that assigns the participating users or better their Ethereum addresses to their balance. All EIP-20 contracts have the same standardized method names, so they can be used by other contracts. For example, there is a method to request the total amount available or a method to transfer a set of tokens from one owner to another owner. This allows larger constructs, such as decentralised exchanges or lending, to be realised on the blockchain.
Caution. Many fungible tokens are often heavily influenced by an enormously volatile financial world. New tokens come and go, trading happens on centralized and decentralized exchanges without any regulation. Unfortunately, far too often investors are deprived of their deposits through fraud (this is known as “rug pulls”). Trading new, unknown tokens is only for extremely risk-averse investors – there is a risk of total loss!
What are coins?
Coins are the native currency of a blockchain, for example Bitcoin (BTC) or Ether (ETH). Coins reward the computers that keep the network running. For Bitcoin and Ethereum, these computers are called “miners”. Miners “mine” new blocks for the blockchain. On Ethereum, miners additionally execute smart contracts when creating a new block. For this service, the miners are rewarded with additional fees by the users. Coins are equally non-fungible, but cannot be programmed. Since coins are the native asset of a chain, they can be transferred much more cost-effectively than tokens.
What are non-fungible tokens (NFT)?
As you can see from the name “Non-Fungible Token”, these tokens are not interchangeable. There is only one copy of each non-fungible token, identified by a unique ID. The “gold standard” of these tokens is based on the EIP-721, another competing standard has the number EIP-1155*. On the first view, such unique pieces seem to be a strange thing. Why do you need a contract that only manages unique tokens?
The use cases arise from the fact that metadata can be stored for each token on the blockchain (on-chain). If there is a lot of additional data, it can also be stored on a normal internet address (off-chain). The additional data is a JSON document hosted in the cloud or made available through the InterPlanetary File System (IPFS). The metadata often contains the internet address (URI) of an image, a video, an audio file or other digital goods. These also reside in the cloud or on a network like IPFS. Through metadata and through linked resources, NFTs can be used as digital art, event tickets, trading cards, game items, or even proof of ownership for physical things. Related apps and websites (e.g. thePortfolio-Tracker from DappRadar) display all the stored information again.
* With EIP-1155 you can create tokens which are fungible again after all! You can use it to create a “pseudo-NFT”, of which there are several limited copies. On the OpenSea marketplace, several people can then purchase exactly the same thing.
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