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5 main types of cryptocurrency tokens

13 June, 2022 Blockchain

Nowadays, online transactions are no longer strange to today’s users when most banks provide online banking applications to use. And the term “Token” is very familiar with banking transactions in the security of online payment transactions. So let’s find out what tokens are!

What is Token?

A token is a unit value that exists on an existing blockchain. In fact, they have also considered a type of cryptocurrency. They do not have their own blockchain, but depend on or exist on an existing blockchain. For example Ethereum, Bitcoin, Waves… In fact, the most popular token issuance platform is Ethereum. It is important for investors to note that there are fees for all token transactions on the blockchain. However, the token does not develop any storage wallets at all. This currency shares a wallet hosted on the native platform and all costs are paid according to the regulations of the platform. Specifically, if the token is issued on the Ethereum platform, wallets such as MyEtherWallet, MetaMask, and Eidoo will be used. At the same time, the transaction costs must use Ether money.

The tokens exist to be used with decentralized applications (dApps). Developers can release them as they wish, for their purposes. Users will then use them to enable the features for which they are designed. For example, Binance (the exchange) also has its own token. When users transact with BNB, their fees are reduced by 50%.

5 main types of cryptocurrency tokens

Platform Tokens

Platform tokens are used to provide decentralized applications (dapps) for various purposes using blockchain infrastructures.

Platform tokens receive increased security and the ability 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 collectables to worldwide advertising and marketplaces.

Security Tokens

As a result of growing regulatory concerns, the phrase “security token” was coined. Regulatory agencies, like the Securities and Exchange Commission in the United States, sought to define cryptocurrencies in a way that didn’t conflict with current legal definitions.

Security 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 earnings, a right to property distribution, or other similar legal rights. Bonds, debentures, notes, options, shares, and warrants are examples of securities that can be transferred among investors or otherwise freely transferable. Security tokens are tokens that act as direct on-chain representations of real-world securities or tokens that are currently not widely used. When a security token, like a share of stock, symbolizes ownership of an off-chain asset such as real estate, equipment, payable bills, or a business, the token’s value is directly linked to the asset’s valuation; the more valuable the asset, the more valuable the token.

Transactional Tokens

To transact, transactional tokens are utilized as units of account and are traded for products and services. These tokens are generally used in the same way as traditional currencies, but they also provide additional benefits in some circumstances.

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.

Utility Tokens

Utility tokens are embedded into an existing blockchain system and utilized to access the protocol’s services. They aren’t designed for direct investment like security tokens, but they can be used to pay for services within their own ecosystems. The link between a platform and a utility token is synergistic, as the platform ensures the utility token’s security while the token offers the network activity required to boost the platform’s economics.

Governance Tokens

The need to refine the decision-making processes surrounding decentralized protocols is crucial as they continue to expand and evolve. All stakeholders can interact, debate, and vote on how to administer a system using on-chain governance. Governance tokens are used to signify support for proposed changes and vote on new ideas in blockchain-based voting systems.

Benefits of tokens

Simple to release

Issuing a new token is extremely simple. You just need to write a smart contract to quickly create new tokens to apply Blockchain technology to the project. The difficulty of this is much lower than creating a new Blockchain; it can take several years of your company’s work without significant advantages.

Easily interact with tokens in the same ecosystem

With tokens you can interact directly in the original Blockchain to exchange the type of token you want; this is very convenient if you use multiple apps in the same ecosystem.

Take advantage of the existing ecosystem

When you create a new token, you also join the ecosystem of the Blockchain that houses your token. You can immediately reach a large number of users as well as other benefits brought by the ecosystem

Multifunction

Tokens can have many different functions such as receiving interest, staking, voting, etc.

Hard to Attack

Hackers can only attack the original Blockchain if they want to take your tokens; But since the original Blockchain is usually very large in scale, it is very difficult to attack.

Summary

All of the above-mentioned forms of cryptocurrency tokens have distinct functions. Defining each category is a crucial step toward gaining a better understanding of how blockchain technology is being used by companies like Maker to enable individuals and businesses to benefit from the benefits of digital money while avoiding volatility.

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