let's say you're wanting a new way to get around well the way that i see it you can either buy your own car and have to manage that car like keep it up to date change the oil replace the tires all that stuff it's overall responsibility to keep that car because it is yours well the alternative is that you could rent a car this means you can borrow a car for a monthly payment and in that case you can use it for whatever purposes you might need you just pay the owner the rent for using
that car and then you don't have to worry about any of the issues depending on the different factors in your life you would have to choose the one that best fits your needs and which one was wiser to go with for example you may not have a bunch of cash to buy a new car outright or maybe you were just super busy and you don't want to take care of the maintenance well if you think of this analogy it's pretty much the same as the differences between a coin and a token a coin uses its
own blockchain to keep track of all the data which in our car analogy would be owning the car when it comes to a token though you are using someone else's coins blockchain as your infrastructure while you basically pay rent when you create a token you don't have to create the blockchain write the full code and worry about how it should be validated instead you just create the token and it runs on that blockchain the best example for this video would be ethereum ethereum is its own blockchain that both stores value and validates transactions ethereum's team
has been working very hard the past few years on improving the entire system updating how it works and patching vulnerabilities an ethereum token or an erc20 token uses ethereum's blockchain's capabilities as its backbone and infrastructure for example basic attention token is an erc20 token built on the ethereum network now the team decided it was not large enough to create their own mainframe but they wanted to create a system where users could reward the creators that they follow in a simple manner without going too deep into it the basic attention token team can focus on providing
a great product that is the brave browser a web browser that automatically replaces a website's advertisements with advertisements that reward the creator with brave if this sounds confusing we are actually creating a video on the brave token soon so make sure to hit the subscribe button and turn on bell notifications if you enjoy these educational animated videos and you want to reward our hard work anyways by creating a token the brave team could rely on ethereum's network to provide safety and stability while they focused on their own product also you should know that a team
of developers can migrate from a token to a coin if they decide that their project is growing quick enough if we think about crypto.com they recently just launched their own mainnet which is a fancy way of saying they launched their own coin now which is now validating their own transactions see they used to have a token but it got so popular that they decided to create their own blockchain and branch off so here's an important thing you can't convert a token straight into a coin you can create a coin that functions the same way and
then create a bridge that will allow users to swap out their previous tokens for the new coins in some cases some coins like leo are tokens on multiple networks for example leo is on the ethereum network the binance smart chain network and the hive network another important thing to know is that some coins are represented as tokens on other networks for example a few days ago i bought something called binance peg ethereum token on the binance smart chain i did not actually buy ethereum but instead i bought a representation of ethereum on the binance smart
chain network that mimics the price of ethereum you might be wondering why i did this well a regular ethereum transaction is around 20 right now however a transaction on the binance smart chain is only 50 cents so it is much more affordable to trade a representation of ethereum on the binance smart chain network you can kind of think about it like if you buy a stock of gold you own the stock but all it does is represent the gold at any time you can cash out that stock for a piece of gold so it's basically
gold at least for trading purposes i hope that this isn't too confusing so while that is a simple version of it there are a few different types of tokens that we can use to categorize the purpose of each token let me go over a couple examples here and maybe you'll get the hang of it if you haven't already so number one platform tokens platform tokens are created to support a decentralized application on the blockchain for example uni swap is a decentralized application that allows users to swap out ethereum tokens for other ethereum tokens and even
though they are a decentralized app they also have their own token the uniswap token this token is given out to those who invest in their platform and it has the promise that eventually token holders can vote on changes in the future and maybe even earn some of the profits from the trades next up we have number two which is security tokens security tokens are minted to represent ownership of another asset for example say you wanted to buy gold but you didn't actually want to hold the gold someone could create a token that is tracked to
the price of gold so instead of actually owning the gold you owned a representation of it which technically would be much safer because it is much more difficult to hack an ethereum token than it is to break into someone's house now the tricky part here is that there should be a real asset behind it for example i could create a gold token ask you to invest in it and not have any gold next up we have number three which are transactional tokens transactional tokens are used as a fast and easy way to transfer money if
we think of the coin x die it is currently pegged to the united states dollar and it's easy for people to pay for say maybe coffee or buying that shirt you like at that local store you can use it the same as cash however the expenses of it are super low right now the transaction fee is .00002 united states dollars and that is ridiculously low to give you an idea of how cheap that fee is you could make over 47 000 transactions and only pay one dollar in fees for them all try doing that on
paypal or through a bank wire number four is utility tokens so utility tokens are tokens that have a value tied to their ownership for example basic attention token is an ethereum token that can be used to advertise on the brave browser in other words if i wanted to advertise this youtube channel on the brave web browser i could do so very easily with my basic attention token in other words utility tokens can actually do something security tokens don't do anything you just buy them and hold them but a utility token can actually be used for
a commercial intent lastly we have number five which is governance tokens governance tokens allow token holders to vote on certain things for example uni swap could be a governance token in a future version of the uni swap exchange token holders could choose to vote to raise the fee of a uniswap trade from 0.3 percent to 0.6 and everyone with a token would be allowed to vote on that change the decision with the most votes chooses the winner so you actually have more voting power by holding more tokens obviously there's a pretty good reason to hold
more tokens by holding more you can actually control the platform more but this comes up with the problem of the authority being centralized but we'll save that for another video now that we've went over the different types of tokens hopefully you understand why we need them and how some of them work if you've enjoyed this video we highly recommend checking out some of our other videos which are created in a similar animated manner thank you guys so much for watching we hope that you learned something and we do hope to see you in the next
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