You may find yourself in a situation, where you have a decent foundational knowledge of various cryptocurrencies. For coins like Etherum, Bitcoin and Ripple, you already know what primary purpose they serve.

However, when it comes to blockchain specifics and tokens, crypto beginners can be a little unsure of how they interact with each other. Or if they even interact at all.

Understanding this interaction will undoubtedly assist in furthering knowledge of the blockchain ecosystem.

So, do blockchains need tokens?

Tokens are an important piece of a blockchains ledger distribution system, however, they are not always needed.

While tokens are usually used in combination with a blockchain, they are not intrinsic to any specific blockchain.

Because of this, tokens are not a requirement for a blockchain to function. In this way, tokens and blockchains are not interchangeable.

A token is usually powered by a blockchain but not all blockchains utilize tokens. There are some blockchains that do not use any cryptocurrency or tokens at all.

The type of token used by a blockchain will vary considerably depending on the type of blockchain or distributed ledgers that it's combined with.

There are four typical situations that a token and blockchain interact with each other:

A token powered by blockchain for verification purposes - ( Bitcoin, Ethereum)

Claiming a tradable asset by leveraging a token against it. Such as bonds, securities, stocks.

Equity - while raising funds in the early stages of a blockchain startup companies raise capital via an Initial Coin Offers (ICO). Early investors are granted tokens which acts like shares in this scenario.

Currency - Perhaps the most obvious aspect, a currency token can be used as a payment method in exchange for goods and services. While this does not currently have widespread adoption - more and more businesses are starting to accept digital tokens as a payment method.

So those are a brief overview of how tokens and blockchain interact with each other.

To further understand token interactions, read on to unravel the digital currency ecosystem’s different aspects of blockchain and their interactions with tokens.

How do tokens work?

It has been established that tokens have an important role when interacting with a blockchain. They are usually hosted on top of the blockchain that they interact with and represent an asset or a utility.

But, how do they actually work?

Generally, tokens require a platform to exist and operate on. When they are created after an Initial Coin Offering (ICO). They are given as an early access stake to interested investors.

Investors can purchase them using both digital and traditional currencies. As the company, assets or projects grows and becomes more successful, the value of the coins can increase, this mirrors the conventional financial process for early investment in a startup or company.

With this in mind, there two main types of tokens.

Security tokens

Security tokens represent a digital investment contract. They can vary in terms of their functionality. They can represent a variety of economic functions, including shares, dividends, bonds.

When considering the current digital currency landscape, what is perhaps most unusual about security tokens is that they actually fall under specific regulatory guidelines.

So when an ICO is launching, the type of tokens being distributed must be established so that the correct regularity guidelines can be applied.

Overall, security tokens very much act like a digital stock.

Utility tokens

In contrast to a security token, utility tokens are significantly less regulated. They typically provide access to a companies product or service. Because of this, they are not considered investments and therefore the regulations against them are not as stringent.

However, utility tokens do tow the line of regulation as they can still have value depending on the context of the product or service that it exists inside. So the lines can be considered a small bit blurred here.

For the most part, when structured correctly, a utility token should act in the same way as a gift card, coupon, or discount code for a companies good or service.

The following video explains this further:

Why do Blockchains need tokens?

Once it is recognized that blockchains and tokens have the purpose of interacting with each other, it may still be confusing about why they are a necessity.

So, why do blockchains need tokens?

The original purpose of blockchain was to be a trustless distributed ledger. The idea here is that all transactions have a digital footprint that can be traced back to its origin.

So, if the purpose of a blockchain is to be a trustless distributed ledger, it only makes sense that any ledger system needs to utilize its own unit of account. This gives the ability to quantify different elements on the system.

For Bitcoin, this unit of measurement is called satooshi, which is currently the smallest unit of the Bitcoin currency recorded on its blockchain.

So, if blockchain tokens are bearer assets, as in they are identity-less and can be spent without using a bank account or third party then it would make sense that a native token is needed to be tied down to that specific blockchain.

Over time these assets will become more valuable as more digital investors look to trade them.

Essentially, various cryptocurrency exchanges will determine the worth of the token associated with a specific blockchain.

To simplify the relationship of a token to a blockchain, a token is just a unit value. It can be reassigned to anyone.

So, if someone wants to make a chain to a blockchain system, (to make a change in the ledger), significant computing power is required.

With this hefty computing power requirement in mind, it’s unlikely that anyone will voluntary make changes to a blockchain ledger without a reward.

So, public blockchains such as Ethereum and Bitcoin, use tokens as a rewarding mechanism for people who provide this computing power to make changes to the blockchain.

A more detailed video on tokens is available below:

What is the difference between coin and token?

So, we’ve firmly established the relationship between a blockchain and a token. Tokens have a meaningful purpose that is dependant on the blockchain being public or private.

But sometimes the coins are mentioned and other times its referred to as a token, You may have heard these two being used interchangeably. So, what is the difference between a coin and a token?

Coins (that are also referred to as altcoins) are essentially just digital money, they are created using encryption techniques, storing value over time.

Coins share very similar characteristics as money, they have limited supply and serve no other purpose than to have purchasing power.

Obvious examples include Bitcoins and Ethers. They are based on public and distributed ledgers where all transactions can be seen, giving a huge amount of transparency of transaction histories.

Coins are just a digital method of payment. You can purchase goods and services with a coin or you can even sell goods and services for coins as well.

In comparison, tokens can represent company shares or give access to a product or service. They can be considered to be a more practical digital representation of a bond or share. They have a much more specific purpose in a project’s or business's ecosystem.

To solidify this with an example, let's say a digital company exists, where their main purpose is to use the blockchain to provide a system to sell concert tickets. The blockchain would benefit this company as it would eliminate the issue of ticket touting because all transactions on the blockchain are available to view.

In this situation, they may want to have a token currency that you can use to buy/sell tickets. This token serves one purpose to buy and sell tickets on this specific platform. With this purpose in mind, this is how it can be differentiated from a standard digital coin.

Tokens can be purchased with a coin or any other type of accepted currency.

However, in most cases, you cannot buy a coin with a token.

These differences put into perspective how coins and tokens differ from each other. They both certainly serve their own purposes and they have much more utility than many cryptocurrency novices are aware of.

The research on this topic clearly separates the concepts of tokens, coins, and blockchains. The categories that each falls into is abundantly clear. And it was interesting to see examples of how blockchain and token interact with each other.

There can certainly be a lot of smoke and mirrors in the industry but learning the intricate systems of how different aspects of digital currency function is quite enlightening for any cryptocurrency beginner.