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Different Types Of Tokens Explained
8 minutes
2 years ago
8 minutes
2 years ago
Since its inception, cryptocurrency and blockchain technology have taken the world by storm. It is difficult to believe that 13 years ago Bitcoin was the only coin on the market. But now with over 18,000 different cryptocurrencies available, it can be difficult to choose the right one to invest in. However, by taking the time to understand the different types of tokens and their functions within the wider crypto market, you can certainly help yourself to make more educated decisions and find coins that suit your investment strategy and interests.
Almost every crypto token on the market can be sorted into a few main categories:
If that sounds like another language to you, do not worry. In this article, we will explain the difference between all of these categories and what they mean for your crypto portfolio.
Transactional tokens do just what you’d expect - they are used to transact. These tokens are the original crypto tokens and function much like traditional fiat currency. Users can purchase goods and services with transactional tokens, or they can simply send these tokens to other wallet addresses. The benefit to transactional tokens is that they don’t require traditional intermediary or central authorities like banks or payment gateways to perform transactions.
Some popular transactional tokens include:
Decentralized applications, or dapps, are built on platform tokens designed for a variety of purposes.
Platform tokens refer to tokens that are used within ecosystems, these can include global advertising companies, marketplace industries or gaming. These tokens give a seamless experience with built-in exchanges for utility tokens and associate experiences for all blockchains, ensuring both stability and safety. These tokens may also be used as a separate currency and are crucial in laying the groundwork for new kinds of systems.
Some popular platform tokens include:
In short, utility tokens don’t pay out dividends or give holders part of an ownership stake. But they do allow users to perform specific actions within a network. For example, they can be used to pay network fees, purchase services, or redeem rewards.
Utility tokens are unique as they are not a mineable type of cryptocurrency; instead they are usually pre-mined and created all at once. Then, the team or company behind the project distributes them accordingly. Many investors eagerly buy a stake in these tokens believing that their value will increase as the utility of the token and business evolve.
Many of the popular utility tokens run on the Ethereum network. Some examples of these include:
In short, utility tokens don’t pay out dividends or give holders part of an ownership stake. But they do allow users to perform specific actions within a network. For example, they can be used to pay network fees, purchase services, or redeem rewards.
Utility tokens are unique as they are not a mineable type of cryptocurrency; instead they are usually pre-mined and created all at once. Then, the team or company behind the project distributes them accordingly. Many investors eagerly buy a stake in these tokens believing that their value will increase as the utility of the token and business evolve.
Many of the popular utility tokens run on the Ethereum network. Some examples of these include:
Governance tokens are a form of cryptocurrency that constitutes voting power on the Blockchain. On-chain governance allows the community to spend their tokens to collaborate, debate, and vote on governance proposals. This process influences the direction of a protocol and is representative of the leading utility token. These protocols include:
Many of the popular utility tokens run on the Ethereum network. Some examples of these include:
Governance tokens allow users to actively influence change in their project, and decisions are limited to only those who have invested in the platform. Rewards from governance tokens occur when a business triumphs or when a platform meets certain goals.
A security token is a portable security device that grants the owner access to a network service by authenticating their identity by simply plugging it into a system. These tokens are issued by the Security Token Services (STS) and are available in many different forms, including:
Hardware - These contain chips as an added layer of security authentication to a service or resource. They also come in ‘soft tokens,’ or mobile device apps used for the same purpose.
Bluetooth/Programmable electronic fobs - One-factor authentication that activates devices remotely, e.g., a car, apartment building, or any other keyless entry system.
USB - These devices plug into USB ports to authenticate a person's identity without the use of a password and provide security when accessing networks.
Since security tokens store crucial personal information, they contain time-sensitive passwords and are reset at regular intervals. Some even use biometrics to protect such sensitive data.
The five main types of cryptocurrency explained above all have a specific function and purpose. As a result, those new to investing or looking to increase their portfolio have a more profound knowledge of how the ever-changing blockchain is evolving and the advantages of digital money.
In summary, the three main tokens that should be kept in mind are:
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