)
The cryptocurrency market is saturated with thousands of cryptocurrencies. This can make it difficult for people to distinguish one crypto from another. Generally speaking, all of these cryptocurrencies fall into one of two categories: coins and tokens. This piece will focus on crypto tokens and list different types of tokens and explore their diverse range of use cases.
What are crypto tokens?
A token is a type of cryptocurrency that is built upon existing infrastructure like the Ethereum or Solana blockchains. By contrast, a coin is native to its own blockchain for. For instance, ETH is the native cryptocurrency of the Ethereum blockchain. This article does not cover cryptocurrencies such as Bitcoin and Litecoin because they are coins, not tokens.
Although cryptocurrency coins are dominant in terms of market capitalization, tokens actually make up the majority of the cryptocurrencies in the market.
Types of crypto tokens
Crypto tokens can be used for a wide range of different purposes, such as utility, governance, rewards, and proving ownership of assets. Let’s explore some of the most common use cases.
Important to Remember
Many tokens do not fit neatly into just one category. There tends to be a bit of overlap. For example, on the Solana network, SOL functions as a utility, staking and a governance token.
Utility tokens
Utility tokens are designed with a particular purpose in mind, generally within the platform or application for which the crypto token has been developed. The most popular type of utility token is as a payment option for purchases on the platform. For example, on the Sia network, Siacoin (SC) can be used to rent decentralized cloud storage.
Utility tokens are often issued by a company as an initial coin offering (ICO) to raise funds to ensure their project can reach its full potential. Just as importantly, utility tokens are released to provide users with a means to pay for new products or services.
Security tokens (aka equity tokens)
Security tokens function similarly to traditional securities. Some tokens are backed by real-world assets. For instance, PAX Gold (PAXG) is backed by gold. Security tokens can also act like a stock or a share in the company, which is initially given to investors once the token sale or coin offering has ended. Similar to stocks, the value of a security token may rise or fall in relation to the company’s performance.
Governance tokens
Using governance tokens, stakeholders can collaborate on shaping the future of a network together. Governance tokens allow for a democratic voting process, where anyone who holds an amount of the token can vote on new community proposals. A good example is Uniswap (UNI), which allows stakeholders to vote on network and protocol upgrades. Some exchange platforms even allow token holders to vote on new asset listings.
NFTs
Non-fungible tokens (NFTs) use blockchain technology to represent something unique, such as a piece of art or an in-game collectible. NFTs also prove ownership digitally using a digital signature that cannot be forged. To date, NFTs have been primarily used for representing digital assets, however, many people believe that in the future NFTs could represent things like concert tickets, vaccine passports, or even real estate. The most well-known NFTs to date are Bored Ape Yacht Club and Crypto Punks, two collections of NFTs, some of which have sold for millions of dollars each.
Stablecoins
Despite the misleading name, Stablecoins are in fact cryptocurrency tokens. They are pegged to real-world assets and fiat currencies like the U.S. dollar or the Euro. These currencies and assets don’t fluctuate much in value, which means that stablecoins can provide a safe place for investors to keep their money without being subject to price volatility. Additionally, these forms of digital currency offer a method of value transfer for people and financial institutions in regions experiencing economic struggles and unstable government-issued currencies. The two most popular stablecoins are Tether (USDT) and USD Coin (USDC). USDC is an ERC20 token that can be stored on any Ethereum wallet. Tether issues currency tokens on several different blockchains, including Bitcoin (using the Omni and Liquid protocols), Ethereum, and Tron.
Reward tokens
These tokens are used as a reputation system in certain blockchain applications. Reward tokens can be given as a reward to show appreciation for a service or contribution. This functions in a similar way to giving compliments on Uber. By themselves, they are not valuable, but they may help the driver gain more customers. A blockchain-based example is Medipedia Point Rewards (MPR), which is given to service providers on the Medipedia platform based on their performance reviews. Utility tokens serve a specific purpose, such as being a means to pay for a service on a platform.
Key Takeaways
Utility tokens serve a specific purpose, such as being a means to pay for a service on a platform.
Security tokens function like company shares or are backed by real-world assets, such as gold.
Governance tokens allow stakeholders to vote on network upgrades.
NFTs represent and prove ownership of unique digital assets.
Stablecoins are digital currencies that provide a non-volatile place to hedge funds as they are pegged to real-world assets and fiat currencies.
Reward tokens can be given to show appreciation for providing a contribution or service and can be a measure of reputation.
Summary
There are thousands of cryptocurrencies in the market, many of which have different use cases. This article has looked specifically at what crypto tokens are and explored the most common use cases. If you want to learn more about cryptocurrency coins or NFTs, you can find a wealth of great content on Swyftx Learn.