Technically, "token" is just another word for "cryptocurrency" or "crypto-asset". But increasingly, it is taking on several more specific meanings depending on the context. The first is to account for all cryptocurrencies except Bitcoin and Etherium (although technically they are also tokens). The second is to consider certain digital assets that operate on top of another cryptocurrency's blockchain, as many decentralised finance (or DeFi) tokens do. Tokens have a huge range of potential functions, from helping decentralised exchanges to selling rare items in video games. But they can all be sold or stored like any other cryptocurrency.
"Token" is a word you often hear in cryptocurrency. In fact, you might hear bitcoin referred to as a "crypto-token" or something similar, because technically all crypto-assets can also be described as tokens. But the word is increasingly taking on two specific meanings that are quite common, and there's a good chance you'll come across them.
"Token" often refers to any cryptocurrency other than Bitcoin and Etherium (although technically they are also tokens). Since Bitcoin and Etherium are by far the two largest cryptocurrencies, it's useful to have a word to describe the universe of other coins. (Another word you may hear with almost the same meaning is "altcoin".)
Another increasingly common meaning of the word "token" has an even more specific connotation, which is to describe crypto-assets running on top of the blockchain of another cryptocurrency. You will come across this usage if you are interested in decentralised finance (or DeFi). While a cryptocurrency such as Bitcoin has its own dedicated blockchain, DeFi tokens such as Chainlink and Aave work on top of or use an existing blockchain, most commonly Ethereum.
Tokens in this second category help decentralised applications do everything from automate interest rates to sell virtual real estate. But they can also be stored or sold like any other cryptocurrency.
Why are tokens important?
Given that you'll come across the word often when researching cryptocurrencies, it's helpful to understand some of the general connotations. But beyond the general definitions in the section above, there are also some categories of crypto-assets that have the word "token" in their name. Here are a few examples of them:
DeFi tokens. In recent years, a new world of cryptocurrency-based protocols has emerged that aim to replicate the traditional functions of the financial system (credit and savings, insurance, trade). These protocols issue tokens that perform a wide range of functions, but can also be sold or stored like any other cryptocurrency.
Management tokens. These are specialised DeFi tokens that give holders a say in the future of the protocol or application, which (being decentralised) do not have boards or any other central authority. For example, the popular savings protocol Compound issues a COMP token to all users. This token gives holders the right to vote when Compound is updated. The more COMP tokens you have, the more votes you will receive.
Non-exchangeable tokens (NFT). NFTs represent ownership of a unique digital or real asset. They can be used to make it difficult to copy and share digital creations (a problem that anyone who has ever visited a torrent site full of the latest movies and video games understands). They have also been used to release a limited number of digital works of art or sell unique virtual assets, such as rare items in video games.
Securities tokens. Securities tokens are a new asset class that are intended to be the cryptocurrency equivalent of traditional securities such as stocks and bonds. Their primary use is to sell shares in a company (very similar to stocks or fractional shares sold in conventional markets) or other businesses (such as real estate) without the need for a broker. Large companies and start-ups are reportedly exploring security tokens as a potential alternative to other fundraising methods.