What are the different types of tokens

Security tokens

Buying ordinary shares, an investor invests in a company with the expectation of its capitalization growth and profit. In fact, a person purchases a stake in a business in order to receive dividends. In addition, certain types of shares grant voting rights at general meetings of the company’s owners.

Security tokens work in a similar way. They serve as proof that the investor owns a portion of the company that issued the token.

It is essentially a digital share certificate that records ownership on the blockchain.

Security tokens do not always give investors the right to make decisions about the company’s operations. However, there is another way to implement this feature – Governance token.

This is a type of token that gives its holders the right to make decisions on the project’s protocol, product, and functions. Investors can influence events within the startup’s operations: introducing a new feature, changing the distribution models of the blockchain’s accounting units, and even revamping the governance system.

Utility tokens

Needed to perform protocol transactions. There are many crypto projects that utilize a utility token. Here are some popular examples:

• Basic Attention Token (BAT). Works with the Brave browser, which is designed to protect privacy. Basic Attention Token allows you to earn money from ad views and saves advertisers from having to constantly track user behavior.
• Chainlink (LINK). A digital oracle unit, an algorithm that uploads information from an external source to the blockchain. Used by decentralized applications that need real-time asset price data.
• 0x (ZRX). A secure and fast cryptocurrency trading platform that uses elements of both centralized and decentralized exchanges.

Utility tokens gained attention due to the ICO boom in 2017. At that time, many projects issued their units of account to raise capital for their ideas. An initial coin offering is a type of crowdfunding campaign in the cryptocurrency market, analogous to an IPO in stocks. Startups launch an ICO to raise money for a new project, app, or coin. Utility tokens served as a tool for funds and became a means of speculation in investors who bought the project’s units of account in the hope that they would bring in a large profit.

Yet utility tokens have a clear purpose – to enable networking. The greater the demand for the protocol, the higher the price of the unit and the project as a whole.

Stable coins

Stablecoins – cryptocurrencies, the price of which is secured by other assets, most often fiat. Allow for transactions, getting rid of volatility.

App coins

APPCs are digital units of a distributed protocol for blockchain-based mobile and desktop programs. A virtual currency with which users (even those without bank accounts) make online transactions, including in-app purchases (IAP). It is also possible to earn APPC without having to have a card.

NFT

In 2021, non-replaceable tokens are in the spotlight. NFTs gained popularity thanks to the blockchain game Crypto Kitties. Users created and bred unique digital cats. To upgrade their pet, they bought chips (additional features) and paid ETH for them. Each kitty has a set of attributes and a unique number.

The Ethereum blockchain protects this asset by storing the information in a distributed network. Therefore, no one can take the kitty away from its owner.

Some specimens are very rare. They can be considered as an investment. For example, CryptoKitty #896775 was sold for 600 ETH. The possibility of exchanging images of these creatures was realized thanks to Ethereum digital units of ERC-721 standard. NFTs are used in the following areas:

• Gaming. NFT allow players to exchange various assets: armor, weapons, artifacts and others.
• Collectibles and works of art.
• Digital Identity. If users store their data on the blockchain, it will eliminate bureaucratic friction.

Debt tokens

Debt tokens are crypto-assets that validate obligations under mortgages, corporate bonds, and other common lending mechanisms. This type of digital coin pays regular dividends. However, like the credit instruments on which it is based, Debt tokens are subject to risks of depreciation or default.

Asset backed tokens

Fix the ownership of assets: goods, real estate, works of art and others. Smart contract technology facilitates transparent, equal and fair distribution of ownership among investors.

DeFi

Digital units of decentralized finance have had a big impact on the crypto economy. DeFi is a new technology that operates through blockchains rather than intermediaries. Developers started to create the first decentralized applications (DApps) on the Ethereum platform. With the smart contract deployment feature, the DeFi sphere is the most open monetary system in the world. Any user with an internet connection can access financial services from anywhere in the world.

If bitcoin is a means of payment, DeFi is a concept related to service via public blockchains. Owners of cryptoassets can earn interest by lending their coins and tokens to other market participants. DeFi is a field of decentralized financial applications that are based on cryptocurrencies and smart contracts. Popular DeFi tools:

• Liquidity provision.
• Profitable farming.
• Staking.
• Lending.
• Insurance.

DeFi is open source, so the protocols are available to all users. Developers can mix features from different DApps to capitalize on the cryptocurrency market. DeFi units of account are the backbone of all decentralized applications.

Web 3

Once upon a time, the Internet became publicly accessible. The web transformed into a more complex system, there was a growth of digital environment with forums, cloud drives, online games and platforms for communication.

But the Internet is still far from perfect. Centralized storage and processing of information has the disadvantage of power being concentrated in one hand. Large corporations store private data. This information could fall to malicious users at any minute. Users also fear censorship and over-regulation by the government. Information is published on sites that can always be shut down.

The spread of Web 3.0 is supported by blockchain technology. The platform provides access to the Internet while providing an autonomous system for storing and sharing data. Web 3.0 fundamentally expands the scope of interaction between people and businesses, from seamless payments to information flow and reliable transmission. The ecosystem makes it possible to work with any person or machine without the need to go through intermediaries.

This shift will give rise to new businesses and business models, from global cooperatives to decentralized autonomous organizations (DAOs) and independent data markets.

Most open source crypto projects can be seen as part of Web 3.0. For example, Polkadot (DOT) and Kusama (KSM).

Ethereum token standards

Ethereum is a decentralized blockchain-based platform that was the first to implement smart contract deployment. The Ethereum network’s unit of account has the ticker ETH. It ensures the platform’s operability through transaction fees.

Ethereum creates ERC (Ethereum Request for Comments) type units on Ethereum. These are standards that define the required set of features for a particular type of digital asset, allowing applications and smart contracts to interact with them in a predictable way. Anyone can create an ERC, but it is the responsibility of the authors to clearly explain their standard, as well as foster community support for it. On the Ethereum network, tokens come in different types.

ERC-20

This is a standard for developing digital assets on Ethereum. They can be reused by other applications, from wallets to decentralized exchanges. ERC-20 is a commonly used standard and a unit of account for many ICOs that is relatively easy to create.

ERC-721

The standard that defines the NFT in the Ethereum blockchain. While ERC-20 is interchangeable, ERC-721 is not. This standard was introduced specifically to allow users to create NFTs – different digital assets.

ERC-721 is used to denote ownership of assets. For example, land, houses or art, virtual assets, digital collectibles.

ERC-1155.

The interface allows multiple types of accounting units to be managed in a single smart contract. It can include any combination of interchangeable and non-interchangeable digital assets: ERC-20 and ERC-721.

By type of emergence

Most cryptocurrencies work on the idea of decentralization (where there is no main server) and depend on computers owned by different people. These users manage the system and maintain the entire network. Cryptocurrencies are important components of the blockchain. They come into existence in different ways. For example, bitcoin can only be obtained by mining. And the tokens of many projects developed on Ethereum were issued overnight as a result of ICOs (initial coin offerings).

There are some exceptions. For example, Tether (USDT) is a centralized stablecoin.

Mining

Cryptocurrency mining is the process of rewarding miners with coins for processing transactions. A participant in the network solves a mathematical problem to obtain a hash and verify a block within the chain. In this way, new digital assets are generated, which are called mined cryptocurrency. These units of account arise every time the verification of a block in a chain with Proof-of-Work(PoW) protocol is completed.

ICO

This is a form of capital raising. Through ICO trading platforms, investors receive cryptocurrencies in exchange for their investment in the business. It is a means of crowdfunding through the development and sale of a digital asset to fund a project.

A startup conducting an ICO sells tokens through a smart contract on the blockchain. Most often, the ERC-20 digital unit standard is used. Coins are issued in a lump sum and distributed according to the tokenization of the project. However, not all digital units are intended for public sale. Part of them is given to the project team, another share is offered in private rounds to venture capitalists. The remaining cryptocurrencies are sold among a wide audience of private investors.

Tokens are assets that give investors access to privileges: from the provision of a certain service to the right to receive company dividends. Depending on the function in the ICO, Utility tokens or Security tokens are distinguished.

Forging

This is the development of new blocks without computational processes on the basis of made steaks. Forging is possible with the Proof-of-Stake algorithm, which provides participants with a reward for verifying transactions. PoS requires the user to have the right amount of digital assets (steak) to do so.

In Proof-of-Stake, constant computation is replaced by locking the cryptocurrency into the system. Chasing requires less energy and runs faster. To create crypto-assets, you need to lock a certain amount of coins for a period of time. Each project has different requirements.

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