Understanding Cryptocurrency Tokens: A Beginner's Guide

If you’re new to the world of digital currency, you will often hear the terms “coin” and “token” used, at times, interchangeably. In our physical world, you know a “token” is a physical (tangible) representation of something of value.

In the world of cryptocurrency, a “token” also represents something of value in a particular ecosystem. Usually, a token represents an asset or utility that a company has, which are given away to investors. This could represent anything from value, stake, voting rights, or any creative item or thought of value. For this reason, tokens can represent more than one concept, taking on different roles.

What Type of Token Do You Have?

There are two types of tokens in the crypto-verse--fungible tokens and non-fungible tokens. Let’s explore both.

Fungible Tokens

A token is considered “fungible” if it can be used interchangeably with other goods or assets of the same type.

Take the following example:

Alice wants to borrow $100 from Bob. To pay Bob back, does Alice need to pay him back with the exact same $100 bill?

Of course not. It’s very easy to pay Bob back with two (2) $50 bills or even ten (10) $10 dollar bills. Same concept with a cryptocurrency token that is considered to be “fungible”. Not all tokens are fungible.

The most popular example of a fungible token is Bitcoin.

Non-Fungible Tokens (NFTs)

Non-Fungible Tokens, or NFTs, aren’t as easily tradeable.

Let’s take the same example above with Alice and Bob, except instead of money, Alice wants to borrow Bob’s car. When she’s done with the car, would it be okay if she gave Bob a different car? Definitely not, and she would probably be facing questions on a stolen vehicle. A story for another time.

In this scenario, the only way Bob will be happy is if/when he gets his car back, and the exact car he lent to Alice. So why is this different here?

Bob’s car is considered a “collectible”, which is why it is considered to be non-fungible. A currency’s value is determined by its fungibility. The more widely regarded and accepted a specific cryptocurrency is, the more people will use it, of course attributing more perceived value to it.

Non-fungibility is a characteristic for items that are considered to be “unique”, rare, or otherwise limited in quantity. Therefore, when you’re interacting with cryptocurrencies, always make sure you know whether or not the token you have or are using is fungible or not. This will dictate what you choose to use as payment.

The most popular example of a non-fungible token is CryptoKitties.