You may have heard cryptocurrencies referred to as a coin or token. While these terms are often used interchangeably, they shouldn’t be. The distinction between coins and tokens depends on various factors, such as the way the asset is used. Coins are often defined as “native” to the given blockchain environment, meaning they are part of core blockchain mechanisms. Tokens leverage crypto technology to serve a variety of other user needs across industries. They are often created on a running blockchain. Let’s look at how tokens are differentiated from one another, how they are used, and some examples of each kind.
Non-Fungible Tokens (NFT)
When thinking of tokens in the crypto space, your mind probably goes to NFTs, or Non-Fungible Tokens first. NFTs are cryptocurrencies with limited issuance that have unique identities and tokens that make them generally impossible to replicate. NFTs act as a digital certificate of ownership to an asset on the blockchain, such as a one-of-a-kind asset, that cannot be spoofed.
When an NFT is minted (or created) on a blockchain, it is assigned a digital signature. This signature prevents malicious altering of the NFT’s content. NFTs allow individuals to own an original item of limited supply or edition, depending on factors such as how the NFT mechanism is implemented and the nature of the NFT. Even though NFTs can represent various types of assets, they are typically used to represent works of art such as photography, collectables, fine art, fashion, music, and even political items.
An NFT artist known as Beeple sold an NFT titled “Everydays: the First 5000 Days” in March of 2020 for over $69M. This NFT featured a collage of 5000 digital sketches drawn by the artist.
Exchange Tokens
Contrary to widespread belief, exchange tokens can be often used outside of their native exchange but are primarily used to facilitate exchanges between tokens or gas payments. Centralized exchanges with or without decentralized platforms can issue exchange tokens. They can be utilized for cheaper gas fees, discounts, increasing liquidity, governing blockchains and much more.
A prime example of a popular exchange token is FTX’s native token, FTT. FTT can be used as collateral on trades, for tighter spread, or to lower trading fees within the FTX platform.
Utility Tokens
Utility tokens are digital units that represent a value on the blockchain, these can be thought of as coupons. These tokens provide special access to a product or service on the blockchain that is run by a token issuer. For example, an individual could purchase tokens and redeem them for access to a given product or service. An important thing to remember about utility tokens is that they are not an investment product. They are generally not held under any financial regulation and could potentially lose all value at any time.
Security Tokens
Security Tokens are a secure form of cryptocurrency that usually obtains its value from an external asset that can be traded under a financial regulation. This kind of token is often used for bonds, stocks, and other real-world currencies. Due to the nature of these transactions, trading must generally be controlled by financial regulators.
Security coins can be broken down further into two categories: equity tokens and asset-backed tokens. Equity tokens are similar to stocks, except that ownership and transferring take place digitally. Investors receive dividends from issuer actions and decision making on the blockchain. Asset-backed tokens are backed by – you guessed it – real world assets, and carry characteristics of gold, or silver in that they are tradable.
Payment Tokens
Payment tokens are used to purchase goods and services on digital platforms without utilizing traditional finance or banking. Most cryptocurrencies fall under this category whether they are security or utility, but not all utility tokens serve as payment tokens. Ethereum and Bitcoin are two great examples of payment tokens.
Governance Tokens
Governance tokens allow holders to vote on the development and operation of the blockchain. They serve as a way for projects to distribute decision making power to the community.
As you can see, tokens are the backbone of all blockchain activity. Understanding the different types of tokens sheds some light onto the endless possibilities that blockchain has to offer.
