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Application Tokens Explained

Decentralized Application Tokens Explained

What do application tokens, CATs and Appcoins have in common? They’re all terms that refer to the same: a crypto asset native to blockchain-based decentralized applications or dApps. 

Decentralized application tokens may sound too technical to even bother to understand them as a newbie crypto investor. However, some dApp tokens are currently going strong with market caps in the millions of dollars.

What are Application Tokens?

Application tokens are the native cryptographically-secured currency of decentralized applications (dApps). Formerly known as Appcoin or Custom Application Tokens (CATs), this type of blockchain-based crypto asset is integral to a dApp’s functionality. It provides the user of decentralized finance (DeFi) apps and protocols access to additional features or services.

DApps are blockchain-powered applications that run in a distributed manner, without relying on a centralized server. To use dApps, you need to own their respective tokens. Decentralized applications incorporate tokens in many different ways but in general, the circulation of these tokens powers all internal dApp operations. A user can use them to unlock advanced functions and additional possibilities to build and configure the dApp.

DApps have emerged as an extremely popular avenue for the development of cryptographic tokens. Issuing tokens is easy and it provides for fast and reliable transactions that are almost impossible to hack. This is why dApp developers like to use tokens as a representation of real value in the protocol’s concept development. 

Why Application Tokens Have Value?

On a technical level, decentralized application tokens have nothing special about them that sets them from other public ledger assets. Instead, the application token derives its value from its successful integration into the application. As long as the application provides value, the related token has a specific value too. If the app becomes popular and the demand for it increases, its native app token gains in value. 

Thus, each application token packs intrinsic value that can fluctuate because it is subject to a price discovery mechanism in the open market, which emerges naturally for blockchain systems due to their decentralized nature. As with other cryptocurrencies, application tokens can be traded and exchanged for crypto or fiat money.

How Application Tokens Work

To make transactions when using DApps, you need the application’s native tokens, which you can obtain in exchange for crypto. For instance, on the Ethereum network, you can pay in ETH to obtain application tokens much like you would use fiat money to purchase casino chips.

Benefits of using application tokens vs. traditional money payments in applications:

Zero downtime: Token transactions take much less time than a bank wire and credit card payments.

Fully private: For token transactions, the user doesn’t have to share their bank details or personal identity thus enjoying full privacy. 

Cost efficient: Token transactions cost the user way less than traditional forms of payment.

Highly accessible: Everything a user needs to perform a token transaction is a stable internet connection. Anyone can participate in dAapp token transactions regardless of their nationality or current place of residence.

Immutable: Immutability is one of the main features of all blockchains and refers to the quality of a distributed ledger to remain unaltered. All token transactions are saved on the blockchain becoming fully transparent , which means that they can be monitored and audited. This makes them more transparent and trustworthy than traditional forms of payment.

Trustworthy: The fact that application token transactions are immutable, decentralized and transparent makes them far more trustworthy than any traditional payment form.

Examples of Application Tokens

Early examples of decentralized application tokens included for instance the TrafficX project, which aimed to create a DeFi counterpart of Uber whereby users could pay for rides in tokens. Another one was MatchPool, a dApp inspired by Tinder, in which tokens could provide users with in-app benefits such as a pro account. 

Some of the most prominent application tokens today include Augur, Uniswap (UNI), Maker (MKR), PancakeSwap (CAKE), Gnosis (GNO), Curve DAO token (CRV) and others. 

Application Tokens vs. Protocol Tokens

So, what’s the difference between a protocol token and a decentralized application token?

Protocol tokens are so-called level-one or base-layer tokens that are native to a blockchain and necessary for its operation. Ether is an example of a protocol token, but many other prominent blockchains with their own protocol tokens exist. Examples include Cardano, NEO, Filecoin, Sia and others. 

Decentralized application tokens, in turn, are layer 2 (L2) tokens because they run on top of an existing blockchain infrastructure using smart contracts.

Takeaways

Decentralized application tokens came into prominence in 2017 and 2018 during the Initial Coin Offering craze when projects raised millions of dollars through token sales. Many successful dApps tokens have stayed on the market powering dApps with real utility and profitable business operations.

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