Since the launch of bitcoin in 2009, the cryptocurrency space has witnessed a tremendous amount of growth. Initially, the technology behind the digital currency was designed to be a way through which people could transfer money in a peer-to-peer manner while preserving a certain level of privacy and control. However, with time and a significant amount of innovation, blockchain technology has been utilized in a number of different ways, evolving beyond a simple decentralized payment system.
With crypto assets expected to continue to in reach, it is important to understand the different types of digital tokens that exist as well as the differences in how they function.
Digital currencies are the best-known type of digital token. The majority of crypto-tokens fall under this category. They are also known as cryptocurrencies, currency tokens as well as digital coins. Digital currencies are based on distributed ledger technology in order to facilitate easy and fast peer-to-peer transactions.
The largest and most valuable of these is bitcoin. However, there are a number of alternatives to it that perform well on the crypto market. These tokens, known as altcoins, changed certain aspects of their blockchain in order to introduce features that bitcoin did not have.
For instance, Litecoin (LTC) can process transactions quicker and at a lower cost than the Bitcoin blockchain while the privacy-centric digital currency Monero (XMR) utilizes code that allows transaction amounts as well as addresses on its blockchain to be completely private. This provides a level of privacy that is not possible when using bitcoin.
As innovation within the space continues, it is likely that altcoins will continue to spring up and challenge bitcoin as the go-to digital currency by providing vital improvements on their pioneering predecessor.
Utility tokens give a user the ability to use a platform. Within a blockchain-based platform that provides a certain service, tokens are required in order to access it. These tokens provide the holder with the authority to exist within a platform. A good analogy to use in order to understand how these tokens work is to consider paid APIs in the context of the Internet economy.
Utility tokens are also referred to as app coins, user coins or network access tokens. They are usually distributed through an Initial Coin Offering (ICO) when the project is launching. The project would do this to raise funds for development while the user would acquire the right to use the product or service developed by the startup. Some projects, for example, allow the holders of these tokens to participate in the ecosystems decision-making process through a vote.
An example of a utility token is the Basic Attention Token (BAT). This token is designed to be used as a payment medium within the Brave browser in the context of advertising. Users, publishers, and the advertisers will use the BATtoken to interact with each other. Users can use the BAT token to have access to premium articles and products, purchase high-quality photos and data as well as send as send donations to providers of their choice.
Utility tokens are a preferred choice by many within the cryptocurrency space because they provide an area through which users can interact with a blockchain platform.
Equity tokens provide the buyer with part ownership of a project. Usually distributed through ICOs, equity tokens are essentially giving the buyer the right to a portion of the project. This is in proportion to how many of the tokens acquired. In other words, equity tokens can be viewed as digital shares in a company.
These tokens are also known as security tokens or tokenized securities. Due to a recent ruling, these tokens fall under the purview of the SEC and, therefore, fall under U.S. Securities Law, which means companies looking to launch these type of tokens will have to ensure they follow these regulations. For investors, equity tokens are a desirable asset class because they guarantee ownership.
Also referred to as asset-backed tokens, these are digital tokens that are used to signify or substitute a physical asset. They are being used to introduce a greater level of security within the physical asset market.
The Goldmint project, for example, uses the blockchain to digitize gold assets and to issue its asset-backed token.
While asset tokens make it easier to acquire physical assets as is the case with Goldmint, they are a less popular choice because the price of a token is designed to be the same as the physical asset to which it is tied.
Finally, there are reputation tokens. These are tokens that signify a users standing within an ecosystem. Using the number of reputation tokens a user holds, it is possible to determine if they are trustworthy. Users will typically acquire these tokens based on participation in a blockchain platform. Because of this, they are also called reward tokens.
A good example of reward tokens is Steem. Steem (STEEM) are reward tokens issued within the Steemit social media and content creation platform. As users post content and interact with other users content on the platform, they accumulate the reward tokens, which they can then cash out for other cryptocurrencies on exchanges.
One of the best features of the crypto asset market is the variety of tokens it offers. Unlike the stock market, which only provides shares in companies, the digital asset market provides a range of different types of investments. Aside from its high potential earnings opportunity, this is one of the main reasons why so many investors are attracted to this market.