Crypto Token Types and Their Use Cases
Tokens and coins are two different terms that people often interchange. If you fall in this category, this post is for you. Here, you’ll understand, what tokens are, how they work, and the different token types.
Difference Between Crypto Tokens and Cryptocurrency
A vague definition of Cryptocurrency is that it was invented to solve the problem of centralization. It allows users to transact without the government’s interference and prevent dependence on one central authority. Cryptocurrency is a native coin of a layer 1 blockchain and is used as a currency, while a Crypto token is a smart contract created on top of a blockchain.
For example, BTC is the native coin of the Bitcoin Blockchain and BTC is a cryptocurrency. Similarly, ETH is the native coin of the Ethereum blockchain and ETH is a cryptocurrency. Uniswap is a Dapp built on the Ethereum blockchain, the UNI token is a “Smart Contract” and is called a Crypto-Token.
We have two types of tokens:
- Utility tokens and
- Security tokens.
Utility tokens are tokens that have a use case while security tokens are regulated and are similar to stocks and shares of a company. For the purpose of this article, we’ll be focusing on utility tokens.
Utility tokens are integrated into an existing protocol on the blockchain, and holders of the tokens can then redeem them to access either a product or service of the company. They are unique to an ecosystem and serve some use cases within that specific ecosystem.
Since they are also assets with value, they can be transferred, traded, bought, and sold. There are several ways a company/organization can issue tokens, one of the most common being through the Initial Coin Offering (ICO) or an Initial Dex Offering (IDO). They are similar to Initial Public Offerings (IPOs) for Company Shares. However, in ICOs/IDOs, holders get tokens in exchange for their investment. Holders of the tokens can then redeem them to access either a product or service of the issuing company.
Creating a token is relatively easier, less technical, and less capital intensive than creating coins since the software to create tokens is readily available. Anyone with access to a computer can create one. As a result, there are different types of tokens, and one of the most popular ones is the Non-Fungible Tokens (NFT) which are currently making waves in the crypto space. Read on to see other token types you probably didn’t know about.
Types of Utility tokens
- Reward tokens
Reward tokens don’t necessarily have the same value as a standard token. They are given as rewards for specific actions, e.g., as a form of appreciation for performance. Examples of reward tokens include Medipedia Point Rewards, which rewards service providers using the platform based on their performance reviews.
- Privacy tokens
Privacy tokens are used for privacy applications, and they are a good choice for those who are highly particular about the privacy of their transactions. Privacy tokens are the most ideal for facilitating highly sensitive transactions although they are also often used for scams and other fraudulent activities. Secret and Zcash are some famous examples of privacy tokens.
- Non Fungible Tokens
A non-fungible token refers to a cryptocurrency token showing that you own a digital asset. The ownership information of this digital asset is stored in the cryptocurrency token. NFTs have been around as early as 2014, but they’ve gained more popularity recently as the preferred way to buy and sell digital art. Examples of assets that NFTs can represent are art, music, videos, in-game items, and avatars.
- Governance tokens
The name gives a good insight into what governance tokens represent. A governance token gives the holder voting right in a cryptocurrency project. By being a governance token holder, you can make a proposal or vote on existing proposals that determine the trajectory of a cryptocurrency project. Your voting power is directly proportional to the number of tokens you hold — the higher your tokens are, the more power you have. An example of a governance token is DHN which helps govern the affairs of Dohrnii DAO.
- Exchange tokens
Exchange tokens refer to tokens specific to the ecosystem of a particular cryptocurrency exchange. Holders of exchange tokens get to enjoy some benefits on the cryptocurrency exchange. An example is the Binance Coin, a token that powers the Binance exchange. Users of the exchange who hold BNB enjoy a 25% discount on trading fees.
By now, you should better understand the differences between coins and tokens in cryptocurrency development. You are also familiar with different types of crypto tokens and their use cases. We bet some have caught your attention, and you should definitely give them a try (after doing your own research, of course!)
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