The concept of transferring non-physical currency can be confusing to many. What exactly is being transferred – if anything – and what does a cryptocurrency actually look like? These are all valid questions, and ones that can be easily explained.
Crypto tokens commonly serve as units of cryptocurrency. They are designed to do the same job as physical tokens or coins like American cents, British pounds, etc. They are simple units of value that can be passed from one person to another.
At a technical level, a crypto token is a simple piece of code that is attached to a single user’s public wallet address. A crypto ‘wallet’ refers to a special type of computer software that is specifically designed to interact with blockchains and is where each user’s tokens are kept.
Unlike physically exchanging real cash from one person to another, transferring cryptocurrency doesn’t involve a transfer of value at all. It’s simply a case of updating the ownership of specific tokens to the new holder’s address. In this way, it’s not the tokens that are transferred between users in the network, but the addresses attached to each token are exchanged.
Read more: What Is Cryptography?
All data related to balances and accounts are stored on a blockchain, which is a continuous, digital record of which tokens are held by which users at any given time. All crypto tokens are identified by unique strings of code, although all the tokens of a certain type are usually treated as identical and interchangeable – much like individual U.S. dollar notes will have a serial number but can be mutually exchanged for another of the same face value.
The innovative feature of crypto tokens is they don’t need a privately managed bank ledger to keep track of how much you have in your account. Instead, that information is immutably logged on a transparent blockchain ledger and verified by all users in the network to ensure only valid transactions and balances are committed to it. This is why cryptocurrencies are referred to as "decentralized" payment systems.
Read more: How Do Bitcoin Transactions Work?
Non-fungible tokens (NFT) are a special type of crypto token that differs in a number of ways from all other traded crypto-assets in the market. The main difference is NFTs cannot be mutually exchanged as U.S. dollar bills or bitcoin (BTC) can. That’s because each NFT points to a completely unique item (whether it be tangible or intangible) and so it has its own perceived value. An easy way to think of NFTs is trying to imagine trading the Mona Lisa for a rare Pokemon card. The two items are completely different, with their own unique traits and features, meaning you couldn’t simply swap them like-for-like.