Why Does a Blockchain Need Coins or Tokens?
Let’s face the facts, it can become quite confusing choosing which cryptocurrency project to invest in. I can literally call out over 100 cryptocurrencies from the top of my head, and this is merely a fraction of the number of cryptos within the crypto space. If you are anything like me, you may probably have wondered why there are so many cryptocurrencies, each with its own coins or tokens. Although we can’t deny the fact that some of these projects are mere avenues to scam gullible individuals, there are still genuine blockchain projects. So why does each blockchain need a separate coin or token?
To understand this, let’s first consider the basics:
What Are Tokens?
Tokens in this respect are digital assets built to perform a specific function within a blockchain. In simple terms, they are a unit of value. Tokes can take on many forms, and by exploring these various forms, we will better understand why blockchains need tokens.
Coins & Tokens are Used to Power the Blockchain: One of the things that separate different countries is the availability of different currencies. If you are in China, you will be talking about the Chinese Yen, the same way you will be performing transactions in US Dollars if you are in the US. Similarly, cryptocurrency blockchains need some form of currency or medium of exchange to operate.
Taking Bitcoin blockchain as an example, miners are required to verify transactions by solving complex mathematical problems. The first miner to solve the problem announces it to other miners who then check if the sender of the funds has the right to send out money. The first miner to get the solution gets compensated with some bitcoins. Miners are incentivized to join the network on the premise that they will receive some bitcoins, and the value of these coins will increase over time. This is my opinion is a good way to source for labor to stabilize the structure of a cryptocurrency project.
For this reason, blockchains need to have tokens or coin to incentivize participants to join their network.
Equity: A crypto token, depending on its intended purpose can give holders some stake or ownership within a blockchain network. This serves the purpose of governance by given token holders some share in the company while serving as a means to raise funding for the blockchain project.
Blockchain-based projects often engage in Initial Coin Offerings (ICOs) to raise capital. This is the equivalent of traditional IPOs. However, considering the boundless and rather lax nature of crypto markets, it is easier to raise funds through ICOs. Those who decide to invest in a blockchain project are given tokens (think of it like shares). And if you ask me, although it is a risk on the part of the investor, it could turn out well. The company gets to raise funds without the hassles of regulation or having a minimum viable product, while the investors stand to profit if the project is successful.