What is Token?
How it works
Tokens are typically created by deploying a smart contract that follows a specific token standard, such as ERC-20 on Ethereum or BEP-20 on BNB Chain. These standards define functions for transferring, approving, and querying balances, ensuring interoperability with wallets, exchanges, and dApps. The contract tracks ownership in a ledger; each transfer updates the state. Tokens do not require a separate blockchain; they live on top of an existing network, benefiting from its security and consensus.
Once issued, tokens can be programmed with custom logic beyond simple transfers. For example, governance tokens like Uniswap's UNI allow holders to vote on protocol changes. Many DeFi protocols use tokens as collateral or liquidity instruments; lending platforms such as Compound accept ERC-20 tokens and mint cTokens representing deposits. Token transfers are often triggered by smart contract calls, enabling atomic swaps, flash loans, and composable interactions across multiple protocols in a single transaction.
Token standards also support non-fungible tokens (NFTs) under ERC-721 or ERC-1155, where each token is unique and represents ownership of digital art, in-game items, or real-world assets. Bridging tokens between blockchains is common via solutions like LayerZero or cross-chain messaging. Token supply can be fixed, inflationary, or dynamic; tokenomics govern minting, burning, and distribution. Compliance with standards ensures that tokens are recognized universally across the ecosystem.
Why it matters
Tokens supercharged blockchain adoption by enabling programmable value beyond simple payments. They unlocked decentralized finance, where assets can be lent, borrowed, and traded trustlessly. Governance tokens give communities ownership. Tokens also represent real-world assets like stablecoins (USDC) and tokenized securities, bridging traditional finance with DeFi. Without tokens, most dApps and protocols would lack a native medium for incentives, utility, and decentralized control.
Real-world examples
Ethereum's ERC-20 standard birthed tokens like USDC (Circle) and UNI (Uniswap). BNB Chain uses BEP-20 for tokens such as CAKE (PancakeSwap). NFT tokens follow ERC-721 (e.g., CryptoPunks) or ERC-1155 (used in games like Axie Infinity). Solana's SPL standard powers tokens like SRM (Serum). Tokens are essential in staking, yield farming, and cross-chain bridges like Wormhole.
FAQ
What is the difference between a coin and a token?
A coin is the native asset of a blockchain (e.g., ETH, BTC) used for fees and security. A token is built on top of an existing blockchain via a smart contract and represents a specific asset or utility.
What are ERC-20 tokens?
ERC-20 is a technical standard on Ethereum that defines a common set of functions for tokens, such as transfer and balanceOf, ensuring they are compatible with wallets, exchanges, and dApps.
How are tokens created?
Tokens are created by deploying a smart contract that implements a token standard (e.g., ERC-20). The contract specifies token name, symbol, supply, and transfer logic, and is then published to the blockchain.
Related terms
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