Guide to Various Types of Crypto Tokens

Introduction

Bitcoin was the coin that first exposed us to cryptocurrency. It was the only peer-to-peer currency transaction system at the time. Further, Other sorts of currencies, known as altcoins, eventually emerged as a substitute for Bitcoin.

Cryptocurrency development did not end there, and many new and distinct kinds of cryptocurrencies were developed to enable various uses. The word “token” was coined due to the development and expansion of Ethereum, and it quickly became a generic name for any currencies built on the Ethereum network. Distinct tokens were split into different groups based on their applications and functionalities.

Coins and tokens are both types of cryptocurrency, although they serve distinct purposes. Coins are created on a blockchain and are meant to be used as a type of money. Ether (ETH), for example, is based on the Ethereum blockchain.

What are alternative cryptocurrencies (altcoins)? And how does it work?

The term “altcoin” refers to any blockchain-based types of crypto tokens that isn’t bitcoin.

Tokens are also based on a blockchain that already exists. Nonetheless, they are programmable assets that enable the creation and execution of one-of-a-kind smart contracts rather than a currency. Outside of the blockchain network, these contracts may be used to establish ownership of assets. Tokens may be used to represent units of value, such as energy, money, points, coins, digital assets, and more. They can also be transmitted and received.

The term “altcoin” was coined as a shorthand for “alternative to Bitcoin,” and the majority of altcoins were created to improve on Bitcoin in some way. Filecoin, Litecoin, Bitcoin Cash, Ethereum, and USD Tether are examples of altcoins types of crypto tokens.

Some cryptocurrencies, like Bitcoin, have a finite number of coins, generating demand and reinforcing their perceived worth. For example, the amount of Bitcoins that may be generated is limited to 21 million, as determined by the Bitcoin creators.

Despite the fact that most altcoins are based on the same fundamental architecture as Bitcoin and share some of its qualities, each one has its own set of benefits for investors. Some altcoins utilize a different method for generating and validating transaction blocks. Some may provide additional functionality, such as smart contracts, or a benefit, such as reducing price volatility.

– Platform Tokens

This types of crypto tokens are used to provide decentralized applications (dapps) for various purposes using blockchain infrastructures. Dai, for example, is defined as a stablecoin since it is soft-pegged to the US Dollar and smart contract methods maintain its price. Still, it is also classified as a platform token because it is based on the widely used Ethereum blockchain.

Platform tokens receive increased security and the capacity to facilitate transactional activity thanks to the blockchains on which they are built. Platform tokens are used in a wide range of businesses, from gaming and digital collectibles to worldwide advertising and marketplaces.

However, compared to Ethereum and other smart contract networks like Solana, the Ethereum Classic ecosystem is less active. According to DeFi Llama, the network has limited activity on decentralized financial apps as of February 2022.

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To find out more about this topic, we recommend reading this article : What is Ethereum Classic (ETC)? What Are Its Differences with Ethereum?

– Tokens of Security

Due to growing regulatory concerns, the phrase “security token” was coined. Regulatory bodies like the US Securities and Exchange Commission tried to define cryptocurrencies in a way that these types of crypto tokens didn’t conflict with current legal standards.

A security instrument is a document issued by a firm, trust, government or other legal organization that memorializes an ownership interest and serves as proof of a debt, a right to a share of profits, a right to property distribution, or other similar legal rights. Bonds, debentures, notes, options, shares, and warrants are examples of securities that may be transferred among investors or otherwise freely transferable. Security tokens are types of crypto tokens that act as direct on-chain representations of real-world securities or tokens that serve a similar role for blockchain projects or digital assets, albeit they are not yet widely used.

Property interests may be represented by security tokens. On the Meridio platform, for example, investors may exchange tokens representing real estate shares and pay in Dai with ease. At the same time, this types of crypto tokens Fluidity Factora allows users to use Dai to invest in real estate in Brooklyn, New York.

When a security token, like a share of stock, symbolizes ownership of an off-chain asset such as real estate, equipment, paying bills, or a company, the token’s worth is directly linked to the asset’s price; the more valuable the asset, the more valuable the token.

– Tokens for Transactions

Transactional tokens are types of crypto tokens that are utilized as units of account and are traded for products and services. These tokens are generally used in the same way as conventional currencies, but they also have unique features. Users may perform transactions without a conventional middleman or central authority, like as a bank or payment gateway, using decentralized cryptocurrencies like Bitcoin. Transactional tokens are not all currencies. Transactional tokens are used by global supply chains and other businesses to apply the immutability of the blockchain and the flexibility of smart contracts to their operations. To elaborate, Dai provides transactional performance to other networks in addition to its role as a currency. POA Network, for example, established xDai, a Dai-like transactional token that runs on a sidechain and allows for quick, low-cost transactions.

– Tokens of Utility

Utility tokens are embedded into an existing blockchain system and utilized to access the protocol’s services. These types of crypto tokens are not designed for direct investment in the same way as security tokens are. They may, however, be used to pay for services inside their own ecosystems. A platform and a utility token have a synergistic connection since the platform secures the utility token. The token, on the other hand, provides the network activity required to support the platform’s economy. Filecoins, for example, may be exchanged for access to the decentralized digital storage capabilities of Filecoin. On the Ethereum blockchain, you can also swap Ether for access to dapps or to execute smart contracts. ERC-20, which lives on the Ethereum network, is by far the most popular standard for creating utility tokens. As of December 2020, there were 829 projects based on it.

– governance token

As decentralized protocols grow and develop, it’s necessary to fine-tune the decision-making processes that surround them. On-chain governance enables all stakeholders to interact, discuss, and vote on how a system should be managed. Blockchain-based voting systems are powered by governance tokens. They’re often used to show support for suggested changes and to cast votes on fresh ideas. “On-chain governance” refers to this method of distributing power among stakeholders. Traditional management positions and the authority to modify the project’s protocol, i.e., its basis in code, are examples of the powers signified by the governance tokens. Users’ votes are sometimes weighted according to the amount of their governance token holdings. As a result, part of the value of governance types of crypto tokens comes from the fact that they provide their holders’ specific capabilities. This might have a role in their high prices: Luna reached more than $80 in 2021. In this regard, they vary from typical cryptocurrencies like bitcoin, which serve as a store of value and means of exchange more like traditional money.