Understanding the Various Types of Crypto Tokens and Their Use Cases
- Crypto tokens are different from altcoins or coins
- Crypto tokens are digital assets that represent the specific use or asset that resides on a blockchain
- There are different types of tokens created to meet specific needs
For one delving into the crypto industry for the first time, the concept of coins and tokens may be regarded as the same. However, there is a world of difference between a coin and a token.
What Are Crypto Tokens?
A crypto token is a type of tradable digital asset that represents the specific use, services or assets issued on a blockchain. While coins are backed by collateral and may serve currency functions, tokens are backed by the utility of their blockchains.
More often than not, crypto tokens are created through an initial coin offering (ICO) and are used to raise funds for a crowd sale. However, they can be used to represent other things, like loyalty points on a retail network.
As the crypto industry diversifies, different types of crypto tokens are created to suit some specific needs. The major token asset classes we have are described below.
Protocol tokens are also known as platform tokens. Protocol tokens represent a platform on which other projects build decentralized applications (DApps). Protocol tokens represent a store of value or a stake on the blockchain that they were issued on.
The most popular platform tokens are Ethereum-based tokens, with others being NEO, ICON and EOS. For example, ERC-20 (Synthetix and Theta), ERC-223 (Chainlink and Energy Web Token) and ERC-721 (CryptoKitties and Axie Infinity) are some of the platform tokens issued on the Ethereum blockchain.
Thousands of projects have leveraged the Ethereum protocol tokens to build their projects, making it the largest DApp ecosystem in existence.
These tokens are designed to fulfill a specific purpose within the platform for which they were developed. While protocol tokens let developers build projects, utility tokens are used to access certain services in their platforms.
They are popularly referred to as DApps coins. The platform provides security for the utility token, while the utility token provides the network activity necessary to strengthen the platform’s economy.
The most common forms of utility tokens are used for payment. However, their use may vary depending on the project. Examples of utility tokens are Filecoin, a utility token used on the digital storage platform,Siacoin, a token used on the cloud-storage platform, and Civic, a token used on the identity verification platform.
Security tokens are tokens issued on a blockchain to represent a real-world asset. Because they represent an external, real asset, they have to adhere to the rules and laws of federal security regulation. They work like traditional securities.
A holder of the security tokens of a company has rights similar to sharing in company stocks. Security tokens are different from utility tokens because they are limited by specific federal laws and rules of stock trading. Security tokens can be bonds, note options, real estate, shares and warrants.
Stablecoins are a special type of token designed with a fixed price regardless of the price of ETH and other cryptos. They are usually backed by fiat currencies and trade 1:1 with their currency pair. The most popular stablecoin right now is Tether, which is backed by USD.
Transactional tokens are tokens created for the sole purpose of transactions. They work like fiat currencies and are used for the same primary purpose, for performing transactions. The pioneer crypto,Bitcoin, is a classic example of a transactional token.
Transactional tokens are sometimes referred to as currency tokens. However, unlike stablecoins, not all transactional tokens are backed by currencies are pegged to the value of a fiat currency like stablecoins. They can be traded for other types of tokens and even be converted directly to fiat currency.
Collectibles and Reward Tokens
The last token asset class is collectibles and reward tokens. These are special tokens created to act as a popularity token for a project. They are usually used by users for participating in a game or reward program of a crypto project.
CryptoKitties is a renowned digital collectible issued to players of the game, while Medipedia Point Rewards (MPR) are tokens given to the service providers based on the reviews they get on the platform.
Although some reward tokens can be converted to other forms of tokens, they usually do not hold the same value as the other types of tokens.
In-game tokens have exploded in popularity as the trend of play-to-earn games fully emerged in 2021. One of the biggest winners is Axie Infinity — a Pokémon-inspired game where players collect NFTs of digital pets (Axies), breed and battle them against other players to earn Smooth Love Potion (SLP) — the in-game reward token. This game was extremely popular in developing countries like The Philippines, due to the decent income they can make playing the game. Philippines players can find out the price of SLP to PHP today on CoinMarketCap.
Now that you have a clearer understanding of what tokens are and the types of tokens that exist, you should be able to make better decisions when looking for an asset to invest in. Make sure to do your own research before investing, and leverage educational platforms like CoinMarketCap Alexandria to help in your research process. Once certain, you can start to buy cryptocurrency using crypto exchanges like Binance.