Investing Tokens

What are Crypto Tokens? And how do they work?

October 8, 2022
What are Crypto Tokens? And how do they work?

Crypto tokens are a rapidly growing market. As the industry grows many investors will need to familiarise themselves with several new technical terms. Many of these terms can seem interchangeable, but in reality, they can mean different things. In this article, we explain what are crypto tokens and give you the lowdown on how they work.

What are digital assets?

When talking about crypto tokens you will hear the term digital assets being used frequently. In simple terms a digital asset is an asset that is represented in a digital form. In a real estate example you could tokenise a property into one or several tokens.

What are crypto tokens?

Crypto tokens are digital assets that are built on another cryptocurrency’s blockchain. Ethereum is the most common cryptocurrency that tokens choose to function on. There are many types of tokens and they operate very differently. We will explain the most common ones in a later section.

So what is a blockchain?

A blockchain is a digital ledger that stores information in blocks that are linked. This information can be transaction records. Alternatively, it can be complex programs that operate on the blockchain, which are called smart contracts. For example, as a cryptocurrency’s transactions are confirmed, these transactions would be grouped into a block, and that block would then be added to the blockchain.

All cryptocurrencies are built on a blockchain. If a cryptocurrency doesn’t have its own blockchain and instead uses another cryptocurrency’s blockchain, then it’s considered a token.

What are crypto coins?

A cryptocurrency can be a coin or a token. Crypto coins operate on their own blockchain whilst tokens use existing blockchain technology from another provider. To hit home this point we can use a real life example.


Ethereum is a very famous blockchain which is used by many token providers. However, Ethereum also has its own native cryptocurrency which is called Ether. As Ether has its own blockchain, it’s considered a crypto coin. Though to make this a little more complicated coins can also be called layer 1 tokens.

When Ethereum was created, it was considered special as it was the world’s first programmable blockchain. The programmable part is important as it allows developers to use it to launch their own cryptocurrencies. Because these cryptocurrencies operate on Ethereum’s blockchain instead of their own, they are tokens and not coins. Whilst others can call these layer 2 tokens.

Previous cryptocurrencies, such as Bitcoin, didn’t possess this capability. The technology used by Ethereum helped it become the second-largest cryptocurrency by market cap.

The official term for tokens built on Ethereum are ERC-20 tokens

What are the benefits of using tokens?

To answer this question we will look at it from the developers’ and the investors’ perspectives.

Developers perspective

Tokens allow developers to create a cryptocurrency without needing to build a blockchain for that cryptocurrency. This is important as it makes the process of developing cryptocurrencies much easier, faster, and less expensive.

For developers who choose to make their own crypto coin, blockchain development is a serious technical undertaking. This is because a blockchain must be:

  1. Secure. The blockchain must be secure so hackers can’t steal crypto.
  2. Rapid. The blockchain needs to process transactions quickly.
  3. Cost effective. All transactions need to be completed cheaply or people with select other crypto options.
  4. A validation mechanism. As cryptocurrencies are decentralised, they rely on people choosing to become validators and lending computing power to the blockchain. To do this they need to incentivise third parties to perform this function.

A token has these issues already dealt with as its developers are using already established technology. This makes building a token a quicker and cheaper option so serves as a better route to market for the developers creating it.

Investors perspective

For investors, they have the confidence that the technology is safe, as they know that the developers are using highly secure technology, that is already established. This is a big advantage.

This leaves leaves investors free to consider other important concepts such as how the token is being used? And how can the token retain it’s value? We answer these questions in a later section.

How do crypto tokens work?

As cryptocurrencies, crypto tokens are assets with value. They can be bought and sold as well as traded and transferred. Crypto tokens are stored in blockchain wallets.

What is a blockchain wallet?

This is a program or hardware device that’s used to store cryptocurrency. Transactions with a crypto token are processed on the blockchain that it uses. Using an ERC-20 token built on Ethereum would need to use the Ethereum blockchain to process all its transactions.

What is the purpose of crypto tokens?

Crypto tokens offer a number of purposes. It can be used for several functions, as well as being used as a storage of value. The video below explains how this relates to real estate.

As you can see everything in the property purchase will be speeded up due to tokenisation. The land searches undertaken by solicitors will only need to be done once, as all the information will be stored on the token. This means future buyers have a shorter due diligence process as the function of the solicitor will be to just look at the info in the blockchain and confirm that the information is satisfactory.

With smart contracts, mortgage brokers can liaise simultaneously with customers and lenders as all information is uploaded to the blockchain and can be accessed by all parties who are given access to decrypt the information.

With tokenisation, property can be split into unlimited tokens so you can have partial ownership of property anywhere in the world. The opportunities are limitless. You can find out more about how tokenisation will impact real estate by clicking on the enclosed link.

Other functions

In addition to their role as a currency, crypto tokens can serve many other purposes. Here are a few of the most common uses for crypto tokens:

  • Governance tokens. A governance token is a crypto token that gives the holder voting rights in a cryptocurrency project. This is similar to shareholders in plc who can hold management to account. As with shares, the more tokens you hold, the more voting power you have.
  • Decentralised finance. Decentralised finance (DeFi) refers to alternative financial systems built on blockchain technology. For example, instead of getting a loan from a lender, you could put up crypto tokens as collateral and get one from a DeFi platform. Each DeFi platform has its own token that it uses as its official currency.
  • Non-fungible tokens: A non-fungible token (NFT) is a crypto token that denotes ownership of a digital asset. The ownership information is stored in the cryptocurrency token. NFTs can be used to show who owns a unique digital image, a GIF, or a character in an online game. This type of token has useful applications in art or property where people may not want fractional ownership.
  • Crypto rewards: DeFi platforms rely on investors who lend their cryptocurrency funds. In return, investors receive crypto rewards as an incentive for doing so. These rewards are paid out as crypto tokens.

Useful terminology

We differentiate between cryptocurrency, altcoin and a range of tokens
Cryptocurrency is a decentralised digital currency. It uses cryptography to verify transactions, and transaction data is stored on a blockchain.
An altcoin is any cryptocurrency other than Bitcoin. The term comes from the fact that Bitcoin was the first cryptocurrency.
A crypto token is a cryptocurrency that doesn’t have its own native blockchain. Developers build it on the blockchain of another cryptocurrency.
Stablecoins such as Tether and USD Coin pegged to the U.S. dollar. They’re designed to maintain a price of $1, and they’re both built on the Ethereum blockchain.
Shiba Inu is a controversial meme token that saw its price skyrocket in 2021. That success was primarily due to its popularity, and the token’s value has fallen significantly since then. It’s also built on the Ethereum blockchain.
Uniswap is the token for the decentralised crypto exchange of the same name. The Uniswap exchange offers cryptocurrency trading with no central governing authority, and, like the others on this list, is built on the Ethereum blockchain.
Chainlink is an oracle network that allows smart contracts on a blockchain to receive real-world data. It’s built on the Ethereum blockchain as well.

Market Overview

There are thousands of tokens out there in the market. Some offer the potential to deliver incredible returns, but the vast majority don’t. The secret to understanding whether a token is viable from an investment perspective is to delve deeper into tokenomics. When a token offering is introduced to the market the developers must complete a Whitepaper. This is an investment prospectus specifically relating to the token offering. Within the whitepaper, there is a tokenomics section. Tokenomics explains how the token functions. Tokenomics cover important information such as how the token incentivises third parties to validate transactions as well as how the token is structured to keep or gain value.

With many coins and tokens, there is very little in their tokenomics which delivers a great incentive to investors. The majority work on a restricted supply to create scarcity, to create value. This strategy is ok when market sentiment is strong. However, when market sentiment is negative a coin or token needs something else to incentivise investors to buy or retain it. Tokens that are backed by tangible assets, or income generating businesses offer investors something more. This is why real estate tokens have delivered good returns to investors in 2022 despite the crypto market falling in value.

The Esper Developments Token

Esper Wealth has a joint venture with the world’s first development company that is seed funded exclusively from tokens. Esper Developments offers investors the option of participating in property development on a pro-rata basis through a token offering. The tokenomics section is structured to deliver outstanding returns to early-stage investors. This token is currently waiting for regulatory sign-off but should be available to investors shortly. Investors who wish to know more can visit the Esper Developments website.