WHAT ARE NATIVE TOKENS?
Native tokens are a blockchain’s inherent digital currency. Every independent blockchain has its own native crypto that is used to reward miners and validators adding blocks to the blockchain and as a payment method, including for transaction fees. These types of tokens are also known as base tokens or intrinsic tokens because a blockchain’s design lets a particular token function with it.
There are also non-native tokens that are derivatives of a blockchain built to rely on the native token. Non-native tokens are made for specific purposes and come in the form of governance tokens, wrapped tokens, and stablecoins, among others.
Examples of Native Tokens
There are several native tokens with their respective blockchains. Some examples are the Ethereum blockchain’s native token, called Ether (ETH); the Binance Smart Chain, which has a native token called Binance Coin (BNB); and Cardano’s native token, ADA.
In other cases, the native token carries the same name as the blockchain: Two notable ones are the Bitcoin blockchain with its native token, bitcoin, and the Stellar blockchain with stellar as its native token.
A ticker symbol is used when identifying a token with a name similar to its blockchain. This is a mix of different letters that represent an asset. For bitcoin, the ticker symbol is BTC, while XLM represents stellar. In other cases, the first letter of the blockchain name is capitalized and that of the native token is lowercased to distinguish the two.
A native token is meant to represent the value of the crypto network’s ecosystem. For instance, Ether represents the value of the entire Ethereum blockchain.
Importance of Native Tokens
To understand the importance of a native token, let’s review how the Ethereum blockchain functions and the role of Ether, its native currency.
The Ethereum blockchain has helped shape several industries because it was designed to have smart contracts, used to develop decentralized applications (dApps). Ethereum is a critical component in decentralized finance (DeFi). The variety of its use cases has added to the value of Ether.
Ether has two primary uses on the Ethereum blockchain: payment, for transactions made via Ethereum and for transaction fees, also known as gas fees; and collateral, which network validators stake to establish their eligibility. Some Ethereum-based decentralized applications also use Ether as an authorized currency to facilitate transactions.
Gas fees on the Ethereum blockchain refer to the fees paid for transactions to be completed. The fees are denominated in Gwei (1 ETH is equal to 1 billion Gwei). Validators are decentralized computers or nodes that approve and confirm transactions. To participate, nodes stake Ether, making them eligible.
Just as Ethereum’s Ether becomes valuable in this way, other blockchains, such as Solana and Algorand, have native tokens that enable smart contracts.
Understanding Non-Native Tokens
Non-native tokens are tokens whose blockchains are derivatives of another blockchain with a native token.
These tokens rely on the native token’s blockchain standards to thrive. The most prominent example of this is the Ethereum blockchain, which houses several decentralized applications with their own tokens. In addition to being a derivative, non-natives tokens are developed for specific uses, either as the only source of payment within their ecosystem, particularly with dApps, or for governing a right on decentralized autonomous organization (DAO) projects.
Examples of Non-Native Tokens
Non-native tokens come in different categories, such as governance tokens, wrapped tokens, stablecoins, and oracle tokens. Some examples of non-native tokens include the Chainlink platform’s LINK; WBTC, a tokenized wrapped bitcoin that runs on the Ethereum blockchain; USD Coin (USDC), a digital currency that is fully backed by U.S. dollar assets; AAVE, the native token of the decentralized Aave platform; and DAO Maker’s governance token, MKR.
LINK, the token of a decentralized blockchain oracle network built on Ethereum called Chainlink, is a classic example of a non-native token and is a primary source of payment. Chainlink is middleware connecting blockchain smart contracts with real-world data, and LINK is used to pay its operators responsible for retrieving off-chain data and performing computations. LINK allows external data to communicate with the blockchain.
For example, when a person uses crypto to bet on the outcome of a football match, the wager is stored on a smart contract. To determine whether the person won or lost, the blockchain needs a reliable source of information; oracle tokens such as Chainlink’s are practical for this use. Besides LINK, other non-native tokens in this category are Band Protocol (BAND) and NEST protocol (NEST).
Uses of non-native tokens and benefits they provide are seen in DeFi and DAO projects, where they provide reduced transaction fees and act as governance tokens.
With a decentralized money market such as Aave, where cryptocurrency can be lent and borrowed, users get a reduced transaction fee when carrying out an activity on the DeFi platform, making it reliable to them.5 This added benefit lets the holder of AAVE govern through voting how the protocol works, changes that should be implemented, and more.
Other categories of non-native tokens include storage tokens, privacy coins, and sports tokens.
Why do non-native tokens rely on native tokens?
Non-native tokens rely on native tokens because the blockchain of the non-native token depends on some aspects of the native token’s blockchain. An example is Chainlink, which depends on the blockchain Ethereum.
Are there non-native tokens besides those on the Ethereum blockchain?
Yes, some non-native tokens exist outside of Ethereum. An example of a non-native token on another blockchain is the USD Coin (USDC) token, found on the Solana, Stellar, and Algorand chains. USDC is a cryptocurrency referred to as a stablecoin, meaning that it’s pegged to the U.S. dollar on a 1:1 ratio; that is, 1 USDC equals $1.
Is it possible to trade both native and non-native tokens?
Yes, it is possible to trade both native and non-native tokens. This can be done on cryptocurrency exchanges that have these types of tokens listed. The CoinMarketCap platform is one website that shows where native and non-native tokens are listed.
The Bottom Line
Native tokens are a blockchain’s foundational digital currency. Every blockchain has its own native coin used to reward miners and validators adding blocks to the blockchain and for payment. These are also known as base tokens or intrinsic tokens because a blockchain’s design functions with a particular token.
There are also non-native tokens derived from a blockchain built to rely on the native token. Non-native tokens come in the form of governance tokens, wrapped tokens, and stablecoins, among others.