What Are Tokens?
A crypto token is a digital asset that exists on a blockchain. On Ethereum and other smart contract enabled blockchains, tokens are usually created and managed by smart contracts. In simple terms: a token is an asset that runs on top of an existing blockchain, instead of having its own separate blockchain.
For example, ETH is the native token of Ethereum. But tokens like USDC, UNI, DAI and SHIB are assets that exist on Ethereum or other blockchains through smart contracts. Tokens can represent many different things. Some are used as money, some give voting rights, and some are created mostly for fun or speculation.
Native Tokens vs Smart Contract Tokens
The terms "coin" and "token" are often used interchangeably in the crypto industry, and there is no universally accepted distinction between them. A more useful distinction is between native tokens and tokens that are issued through smart contracts.
A native token is the built-in asset of a blockchain. For example, ETH is the native token of Ethereum, BTC is the native token of Bitcoin, and SOL is the native token of Solana. Native tokens are typically used to pay transaction fees and help secure their respective networks.
Other tokens are created on top of existing blockchains using smart contracts. For example, USDC can exist as a token on Ethereum, Base, Arbitrum and other networks. It does not need its own dedicated blockchain to function.
How Do Tokens Work?
Most tokens on Ethereum and other EVM chains are controlled by smart contracts. A smart contract is code that runs on the blockchain. The token contract keeps track of important information, such as:
- How many tokens exist
- Which addresses own those tokens
- How tokens can be transferred
- Whether tokens can be approved for use by other smart contracts
When you send a token to someone, your wallet does not move a file from one device to another. Instead, you sign a transaction that tells the token contract to update its records on the blockchain.
This is why tokens can be used across many wallets, exchanges and applications. The token itself lives on the blockchain, while your wallet gives you access to the address that owns it.
Types of Tokens
Tokens can serve many different purposes. These are some of the most common categories.
Utility Tokens
Utility tokens are designed to have a specific use within an ecosystem. For example, a token may be used to pay for services, unlock access to features, reward users or interact with a specific protocol. The value of a utility token often depends on how useful the underlying product or network becomes.
Governance Tokens
Governance tokens are used to vote on decisions within a project or protocol. For example, holders may vote on protocol upgrades, treasury spending, parameter changes or other proposals. Governance tokens are common in decentralized finance and DAO ecosystems.
However, owning a governance token does not always mean you control the project directly. Governance systems can vary widely, and many projects still have teams, foundations or other stakeholders involved.
Stablecoins
Stablecoins are tokens designed to track the value of another asset, usually the US Dollar. Examples include USDC, USDT and DAI. Stablecoins are commonly used for trading, payments, lending, borrowing and moving value between different blockchain applications.
Not all stablecoins work the same way. Some are backed by reserves, while others use crypto collateral or algorithmic mechanisms. This means different stablecoins can carry different risks.
Memecoins
Memecoins are tokens that are often created around memes, internet culture or community hype. Some memecoins become popular because of strong communities, attention and speculation. However, many memecoins have little or no utility, and they can be extremely risky. Prices can move quickly, liquidity can disappear, and some memecoins are created purely to take advantage of buyers.
Non-Fungible Tokens
Non-Fungible Tokens, or NFTs, are unique tokens. Unlike regular tokens, NFTs are not interchangeable with each other. For example, one USDC is equal to another USDC. But one NFT from a collection may be completely different from another NFT in the same collection.
NFTs can represent digital art, collectibles, game items, memberships, tickets, domain names or other unique assets. While NFTs are technically tokens, they are usually discussed separately from fungible tokens because they behave differently.
Token Standards
A token standard is a set of rules that defines how a token should behave. These standards make it easier for wallets, exchanges and applications to support many different tokens. The most common token standards on Ethereum and EVM chains are:
- ERC20 for fungible tokens
- ERC721 for NFTs
- ERC1155 for semi-fungible and multi-token collections
ERC20 is the most common standard for fungible tokens. Many stablecoins, governance tokens, utility tokens and memecoins use ERC20. ERC721 is the most common standard for one-of-one style NFTs and profile picture collections. ERC1155 is often used for gaming items, collectibles and projects that need multiple token types within one contract.
There are also newer standards and extensions. For example, EIP-2612 allows certain ERC20 tokens to support approvals through signatures instead of regular on-chain approval transactions. This can improve user experience, but it also means users need to be careful about what they sign.
Why Do Tokens Need Approvals?
When you use decentralized applications, you may need to give a smart contract permission to use your tokens. For example, if you want to swap USDC for ETH on a decentralized exchange, the exchange contract needs permission to access your USDC. This permission is called a token approval.
Token approvals are useful because they allow smart contracts to interact with your tokens. But they can also create risk if you approve a malicious contract, approve more than necessary, or leave old approvals active for contracts you no longer use.
Why Did a Random Token Appear in My Wallet?
Sometimes tokens appear in your wallet even though you did not buy them or ask for them. This can happen because wallet addresses are public. Anyone can send tokens to any public address on the blockchain.
In some cases, these random tokens are harmless spam. In other cases, they are part of a scam. Scammers may send fake tokens to many wallets and hope that users search for the token, visit a malicious website, or try to sell it through a dangerous interface.
A random token appearing in your wallet does not automatically mean your wallet is compromised. But you should be careful before interacting with unknown tokens, websites or contracts. As a general rule, avoid interacting with tokens you do not recognize or trust.
How Are Tokens Bought and Sold?
Tokens can be bought and sold in different ways. One common way is through a decentralized exchange, or DEX. A DEX is a smart contract system that allows users to trade tokens directly from their wallet without using a centralized intermediary. Popular examples include Uniswap, Curve and Balancer.
Some tokens are also listed on centralized exchanges, such as Coinbase or Binance. In that case, users trade through an account on the exchange instead of directly from their own wallet. The main difference is custody. When you use a centralized exchange, the exchange usually controls the assets until you withdraw them. When you use a DEX, you trade directly from your own wallet.
Token Risks
Tokens can be useful, but they also come with risks. Some common token risks include:
- Smart contract bugs
- Malicious token contracts
- Fake tokens pretending to be real tokens
- Low liquidity
- Extreme price volatility
- Centralized control by insiders
- Unlimited or overly broad token approvals
- Misleading token names, symbols or branding
Just because a token appears in your wallet does not mean it is valuable or safe. Anyone can create a token, and scammers often create fake versions of popular tokens to trick users. You should always verify that you are interacting with the correct token contract, especially when trading, bridging or approving tokens.