Many new tokens are created on the blockchain every day. However, the type of tokens varies greatly. One token entitles you to profit-sharing, another gives you the right to perform actions on the blockchain, and yet another type of token acts as an actual digital share.
In this article, we take a closer look at cryptocurrencies, covering the basic definition and answering the most important question: What types of cryptocurrencies are there?
Utility tokens can be used to access or pay for a product or service of a particular crypto project. The tokens have a specific use case within the blockchain project ecosystem. Therefore, these types of tokens are also often referred to as “User Tokens”. The bulk of the utility tokens in the current market are ERC-20 tokens created on the Ethereum blockchain.
Therefore, a utility token is initially not intended to serve as an investment, as these types of tokens are focused on the token functionalities of the respective blockchain project. Nevertheless, there are a lot of cryptocurrency investors who buy utility tokens to profit from them. It is understandable, too, since most of all cryptocurrencies are utility tokens, and many of them have seen significant price increases.
Security tokens can be seen as an investment product. The tokens are purchased with the expectation of receiving dividends or making a profit off of the token. Security tokens can be brought to market just like utility tokens, not through an Initial Coin Offering (ICO), but a Security Token Offering (STO).
An STO is similar to an ICO but relatively safer as projects issuing security tokens are bound by certain laws and regulations, therefore reducing the chances for possible exit scams. This is not the case for utility tokens, which is why many projects have bitten the dust.
Projects need to meet requirements as security tokens fall into the same category as shares, bonds, and ETFs. This can be accompanied by limitations in the area of tradability. Exchanges listing security tokens also need a security license, which many exchanges currently don’t have—making it harder for security tokens to list on the current major exchanges.
Equity tokens are more of a subset of the security token. With equity tokens, you become a partial owner of the project. By buying equity tokens, you actually buy yourself into a company. An equity token can be compared to a digital share registered on the blockchain. Equity tokens, like security tokens, are also bound by the laws and regulations of the Security and Exchange Commission (SEC).
Asset tokens are tokens that represent a physical product. With an asset token, you can have your house represented by a cryptocurrency or token. For example, you could sell part or all of your house using asset tokens through the blockchain. Other examples of products that lend themselves well to tokenization in an asset token are book and film patents, commercial properties, and accounts receivable and payable balances.
The Reputation token, also called ‘reward token’, is a token used within the ecosystem of a blockchain project. The amount of reputation tokens you own determines your ultimate status within the network. You can earn reputation tokens by actively participating in the network.
By completing tasks, you get rewards in the form of reputation tokens, and the more tokens you have, the higher your reputation within the network becomes.
A non-fungible token, also known as NFT, is a unique token that cannot be replaced by something else. NFTs are great for digital collectibles, art, luxury goods, and all sorts of other physical and digital products that can be verified on the blockchain. Because of this, they are similar to asset tokens. However, it’s more than just art or collectibles; projects also issue tickets and certificates of authenticity as NFTs.
Governance tokens allow tokenholders to help shape the future of the protocol. A platform that allows itself to be shaped by its users using the governance token is called a Decentralized Autonomous Organization (DAO). The holders of the governance token can agree on changes within the protocol.
The governance token is characteristic of DeFi projects because it gives users rights and control, something that is a basic principle of the entire crypto revolution.