Types of tokens explained
As crypto value is on the rise, more and more investors and traders turn to digital currency as a more attractive alternative to traditional stocks. The main difference of digital cryptocurrency from the traditional money is in using various encryption algorithms and cryptographic techniques, such as elliptical curve encryption, public-private key pairs, and hashing functions, among others.
Cryptocurrency is presented by tokens, and there are currently six types of tokens on the market, with more to potentially appear in the near future. Knowing each of the token types, as well as their purposes helps with making the right decisions while trading. Below is our cheat sheet in no particular order.
#1. Currency tokens
As the name suggests, these are the tokens used as a form of payment and a store of value. By definition, currency tokens are similar to ‘coins’, since they serve just the same purposes as Bitcoin or any other cryptocurrency.
#2. Utility tokens
With the invention of Ethereum, utility tokens became quite popular also. Unlike currency ones, they cannot be used for every purchase. Instead, they’re giving their holders access to products and services within a specific network, providing a multifunctional use.
#3. Security tokens
Based on its name, this type of tokens is responsible for ‘securities,’ and often promise investment returns and value appreciation. The potential for profit, passive income and dividends has established their classification under the US Securities and Exchange Commission (SEC).
#4. Equity tokens
While this type of tokens is still more of a theoretical concept, they give their holders an ownership share of the issuer’s capital, similar to traditional stocks.
#5. Reward tokens
As it’s visible from the name, ‘reward’ tokens are equivalent of loyalty points or other reward programs in иlockchain.
#6. Dividend tokens
This type of tokens offers a share of the profit of an organization. Some blockchains implement this type of tokens and provide dividend-like features. Dividend tokens are very similar to stocks and can even carry voting rights.
Another classification that may confuse a lot of starting crypto traders is “native” and “non-native” tokens. Their difference is simple. Native tokens give direct exposure to blockchain protocols themselves. The most famous native tokens are Bitcoin, Ether, NEO and Steem, as well as EOS and Icon.
On the other hand, non-native tokens are usually issued through Initial Coin Offerings (ICOs). By definition, they are similar to Initial Public Offerings (IPOs), and are offering stock options in an existing company. A wide variety of startups are involved in ICOs in order to raise funds for their projects and typically are not looking to use blockchain, or DLT, in their business model. Same as in the investment industry – if you’re able to find the right non-native token, its value can go drastically up, if the company’s valuation rises.