Crypto Basics: Native and Non-Native Tokens

Bitcoin, blockchain and cryptocurrency are words that most people have at least heard of since the industry exploded into the mainstream public consciousness over the last year-and-a-half.

Over the course of this series of articles, we’ll be delving into the basics of the industry, providing an introduction to crypto that will give you a solid grounding in the technology and a lexicon for its terminology — cryptographers should never be allowed to name anything the public will eventually need to know.

In short, it will be enough to understand what people are talking about and decide if you want to learn more.

Read more from PYMNTS’ Crypto Basics Series:

What’s a Blockchain and How Does It Work?


What’s a Crypto Wallet and How You Can Avoid Losing a Quarter Billion Dollars?

How to Lose Your Crypto Without Being Hacked

Is Bitcoin Really Anonymous and How Can Law Enforcement Track It?

What’s a Consensus Mechanism and Why Is It Destroying the Planet?

What Is Mining, and Why Doesn’t the Business of Bitcoin Work

The Tokenomics of Crypto

What’s a Permissioned Blockchain and How Does Centralized Decentralization Work?

PYMNTS Crypto Basics Series: What’s a Satoshi? Bitcoin’s Million-Dollar ‘Penny’

So, what’s a native token, and why do you care?

Well, for one thing, you may need both a native and a non-native token to make a transaction on a blockchain decentralized application, or DApp.

Starting at the beginning, both native and non-native tokens are types of cryptocurrency used to do something — really, do anything — in crypto.

A native token is the base token of a blockchain, and is often needed for transaction fees.

The native token of Ethereum is ether and the native token of Cardano is ada — named for Ada Lovelace, widely regarded as the world’s first computer programmer — but by and large, the cryptocurrency has the same name as its blockchain. So, the Bitcoin blockchain’s native token is bitcoin, Stellar’s is stellar, and so on.

For that reason, people sometimes refer to the token by its exchange symbol for clarity: bitcoin is BTC, ether is ETH and Stellar is XLM.

A non-native token, on the other hand, is a cryptocurrency created by a project for use only within its own borders. They are usually either the only token accepted for payment within the DApp, or come with some sort of benefits, as we’ll see below. They can have many uses within that DApp’s ecosystem.

In addition, they are built according to the technical specifications and standards of the native token of the blockchain the project is built upon. It is, effectively, a white-labeled cryptocurrency.

Going Native

Let’s start with ether, as it is the standard for cryptocurrency tokens, given that far more DApps are built on Ethereum than any other blockchain.

The ether tokens can be used in three basic ways: to make payments via Ethereum, to pay all transaction fees on Ethereum, and as a currency within some DApps built on Ethereum.

The first use is fairly straightforward: If you want to buy a non-fungible token (NFT), for example, most marketplaces price them in ether. Or, if you want to make a smart contract in which Fred will sell Betty his car for $5,000, Betty will deposit (“lock”) that amount in ETH into the contract. When the terms are met — such as handing over the keys — the ether will automatically be sent to Fred’s wallet.

Read more: PYMNTS DeFi Series: What Is a Smart Contract?

The second use is the transaction fee. For any transaction to be written onto the Ethereum blockchain, a fee is required, with higher fees bringing higher priority.

Each ether token is divided into wei, similar to dollars and pennies (except that each ETH can be broken into far, far more than 100 parts). Transaction fees are priced in wei.

Third, some DApps use ether as their currency rather than create their own non-native token. This is simpler as you don’t have to manage a cryptocurrency, but you also can’t mint your own. Many decentralized finance (DeFi) projects are funded — and many developers and investors paid — with a portion of the non-native tokens created for that DApp project.

Terminology Alert: ERC-20 Token

Any non-native token built on Ethereum is built to standards set by Ethereum’s developers that let the token work in the smart contracts run on the blockchain. By far, the most common is ERC-20 (or ERC20), which is basically a white-labeled standard ether token. There are many others, generally for niche purposes. The only one you might run across is ERC-721, the standard for NFT tokens. 

Non-Native Tokens

As mentioned above, one of the main reasons to use a non-native token is to make a profit from a DApp. Many cryptocurrency projects describe the “tokenomics” of their non-native currency by specifying, for example, that 40% will be sold, 40% will be put in a reserve to fund the DApp’s ongoing marketing and development, and 20% will go to the developers.

If the project takes off and the token’s value rises, the backers get a big payoff. Basically, it’s the crypto version of a startup’s stock options.

While non-native tokens can be used for almost everything in a DApp, the transaction fees — called “gas” fees in Ethereum — have to be paid in ETH (denominated in wei).

Let’s look at a couple of non-native tokens to see how they’re used.

A simple one is LINK, the non-native token used on Chainlink, an oracle DApp that provides information feeds that can be used to make smart contracts pay off.

In the example linked below, a blockchain-based insurance provider offers farmers crop insurance that pays in set conditions — say, a freeze in the wrong season — based on a trusted source of weather reports, rather than by sending an adjuster to see of the crops were damaged.

See also: Smart Contracts Get Weather-Savvy With AccuWeather on the Blockchain

LINK tokens are used to pay for access to those news feeds.

Many Functions

A less simple one is the decentralized finance lending platform Aave, which uses the AAVE non-native token built on Ethereum.

In Aave, investors deposit various cryptocurrencies into lending pools that borrowers can tap for loans by depositing collateral.

While a number of different cryptocurrencies can be used in lending pools and as collateral, using AAVE brings benefits. For instance, putting up AAVE as collateral gets borrowers reduced fees (which are separate from interest rates) and allows them to take out larger loans for the same value in collateral.

AAVE is also a governance token, giving holders a vote of any changes to the decentralized autonomous organization (DAO)-controlled project. This can range from code updates to fee rates.

In fact, Aave has a second non-native token, called aToken, which is given to lenders who lock tokens into borrowing pools as a reward above and beyond fees and interest.

Then there’s USD Coin, or USDC, the stablecoin issued by Circle. It was first issued on the Ethereum blockchain but there are now non-native USDC tokens issued on a number of different blockchains, including Ethereum, Solana, Stellar and Algorand.

They are all pegged to the dollar by the same reserve fund of U.S. dollars, but Ethereum USDC is usable on Ethereum only, while Solana USDC is for transactions with projects on that blockchain. The transaction fees are in the appropriate blockchain’s native token — ETH and SOL in this example.

It’s worth noting that Ethereum made it very easy to build a non-native cryptocurrency on an ERC-20 token base, making it easy for DApp developers to give their projects their own currency without great expertise or expense.

It is, largely, why there are so many cryptocurrencies — 18,000 is a number battered around these days. You don’t need to build a blockchain to make your own, which has marketing benefits on top of everything else.

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NEW PYMNTS DATA: THE TRUTH ABOUT BNPL AND STORE CARDS – APRIL 2022

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