In the cryptocurrency and blockchain world, tokens perform a wide range of functions, from facilitating transactions to enabling access to DApps and powering smart contracts. Now tokens are not just the digital representation of value, they influence innovation across many industries, from finance to gaming. That's why understanding the various token categories is important for anyone who interacts with the crypto world and wants to benefit from it or store their value correctly. In this guide from Notum, we will talk about tokens, the difference between coins and tokens, and also pay attention to the main token categories that exist.
What Are Tokens?
Crypto tokens are digital assets that represent a unit of value or utility on a blockchain. They are created and managed using smart contracts on different blockchain platforms like Ethereum. These tokens represent a wide range of assets or utilities, from cryptos themselves (such as Bitcoin and Ethereum) to digital representations of real-world assets like real estate. Tokens can serve various purposes, including facilitating transactions, representing ownership of a digital asset, granting access to a platform or service, and even representing voting rights in decentralized governance systems.
One of the key features of tokens is their versatility. They can be customized to fit specific use cases, allowing developers to create tokens that cater to a wide range of applications, from DeFi to NFTs in many industries. Additionally, tokens benefit from blockchain technology's security, transparency, and immutability, making them a reliable and efficient means of transferring value and representing ownership.
What Is the Difference Between Crypto Token and Crypto Coin?
Cryptocurrencies can be broadly divided into two main types: crypto tokens and crypto coins. These terms refer to distinct digital assets with differing underlying technologies and use cases.
- Crypto Coins. These are digital currencies that operate on their own independent blockchains, like Bitcoin (BTC). Coins have their own dedicated networks, using proof-of-work or proof-of-stake consensus mechanisms to validate transactions and secure the blockchain. Coins are typically used as a medium of exchange or store of value and have a fixed supply cap. They are not reliant on other platforms or projects.
- Crypto Tokens. Tokens are built on existing blockchain platforms like Ethereum, which means they rely on these blockchains for their functionality and security. Tokens can serve multiple purposes, including representing assets (for example stablecoins like USDT), enabling access to specific platforms or services (for example, Binance Coin for Binance's ecosystem), and powering DApps. Tokens are often created using smart contracts and can have various supply dynamics.
Thus, the main difference lies in their underlying technology and purpose. While coins operate independently on their blockchains and are primarily used as digital currencies or stores of value, tokens use existing blockchains and serve various purposes within specific ecosystems.
Top Main Token Categories
The token categories are designed to fulfill specific roles within the blockchain and crypto space. The main categories include utility tokens, payment tokens, security tokens, and stablecoins. Let's look at each of them:
- Utility Tokens
Utility tokens refer to one of the main token categories that are primarily designed to serve a specific purpose or provide access to a particular product or service within a blockchain ecosystem. Utility tokens are often used as a means of payment within DApps, covering transaction fees, or accessing certain functionalities like governance voting. Unlike for example, security tokens, utility tokens do not typically represent ownership in a project, and they do not offer dividend payments or voting rights. Instead, their primary function is to facilitate interactions and transactions within the blockchain network, making them essential components of various decentralized ecosystems.
Examples of utility tokens is Ethereum (ETH) on the Ethereum blockchain, which is used to pay for transaction fees and execute smart contracts, or Binance Coin (BNB) within the Binance ecosystem, which can be employed to reduce trading fees on the Binance exchange and participate in token sales on the Binance Launchpad. Overall, utility tokens play an important role in enabling the functionality and growth of blockchain-based platforms.
- Payment Tokens
Payment tokens are a token category that serves as a medium of exchange, enabling users to facilitate transactions and make payments within decentralized networks. The main function of payment tokens is to transfer value from one party to another. They use blockchain to ensure secure and transparent transactions while also reducing the need for intermediaries like banks. Payment tokens like Litecoin (LTC) are often used as digital currencies but remember that their value can change depending on the market demand.
The key feature of payment tokens is their ability to work independently, without traditional financial institutions and government authorities. Thereby, they provide users with control over their financial assets and transactions. Payment tokens are typically decentralized and rely on consensus mechanisms like PoS or PoW to validate and record transactions on the blockchain. As a result, such tokens have gained widespread adoption and have become a popular alternative to fiat money for online purchases, cross-border transactions, and even as stores of value.
- Security Tokens
Security tokens are a specific category of blockchain-based tokens that represent ownership of real-world assets. Unlike utility tokens, which are primarily used for accessing a product or service within a blockchain ecosystem, security tokens value from underlying assets such as stocks, bonds, real estate, or commodities. These tokens are designed to comply with existing securities regulations and are subject to the same legal frameworks that govern traditional financial instruments, making them a bridge between the traditional financial system and the crypto world.
One of the key features of security tokens like Polymath (POLY) is that they offer investors ownership rights in the assets they represent. “Similar to traditional securities, they represent an ownership interest in an asset– only they've been created digitally to unlock the power of the blockchain.” – PolymeshNetwork. This ownership is often reflected through digital contracts or tokens that are issued and recorded on a blockchain, providing transparency, security, and efficiency in the transfer and management of ownership. Security tokens have gained popularity as they can potentially show the process of buying and selling securities, reduce intermediaries, and enhance liquidity by allowing for fractional ownership of high-value assets.
Stablecoins are one of the most famous categories of tokens within the crypto space. Unlike traditional cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH), which are known for significant price volatility, stablecoins are designed to maintain a stable and predictable price. They achieve this stability by pegging their value to an underlying asset, such as fiat money like the US dollar or even other cryptocurrencies. This pegging mechanism ensures that the value of a stablecoin remains the same, making it a useful medium of exchange and store of value.
Stablecoins like Tether (USDT) serve various multiple purposes in the crypto space. They provide a bridge between the traditional financial system and the DeFi crypto world, as they offer stability in the space of price fluctuations associated with other digital assets. This feature makes them useful for trading, storage of value, and investment, as well as for facilitating cross-border transactions.
- DeFi Tokens. Decentralized Finance tokens are digital assets built on blockchain technology, typically Ethereum, that enable various financial services such as lending, borrowing, trading, and yield farming without the need for traditional intermediaries like banks. These tokens represent ownership or participation in DeFi protocols and ecosystems, allowing users to access and interact with DeFi services, while also often serving as governance tokens for decision-making within these platforms.
- NFTs. Non-fungible tokens are unique digital assets that represent ownership or proof of authenticity of a specific item, piece of content, or collectible using blockchain technology. Unlike cryptos such as Bitcoin (BTC), NFTs are indivisible and cannot be exchanged on a one-to-one basis due to their distinct characteristics, making them ideal for verifying ownership of digital and physical assets, including art, music, and more.
- Asset-backed Tokens. Asset-backed tokens are digital tokens that represent ownership or a stake in physical or digital assets, such as real estate, commodities, or financial instruments. These tokens use blockchain to provide transparency, security, and divisibility of ownership, allowing investors to hold fractional shares of valuable assets and trade them efficiently on blockchain-based platforms.
As known, each category of tokens in the crypto space serves a specific value, so it is important to know their types and understand the difference between them. The main categories, namely utility tokens, payment tokens, security tokens, and stablecoins have made a great contribution to the whole crypto and blockchain ecosystem. While some tokens are needed as a means of payment in various decentralized applications, others help users make transactions, represent ownership, and even maintain a stable price in the volatile crypto world. As the crypto space continues to evolve, these categories will adapt and expand, offering users new features and innovations.
Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.