Contrary to popular opinion, coins and tokens are not interchangeable terms, but there is a clear distinction between them.
Coins serve currency functions, meaning they can be a store of value and also be used for payments.
Examples of popular coins include:
- Bitcoin
- Ethereum (ETH)
- Litecoin
On the other hand, tokens leverage crypto technology to serve a variety of other user needs across industries.
Coins also have their own blockchain, while tokens are built on a blockchain and utilize its features.
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SEE ALSO: South Africa Regulatory Body, IFWG, Highlights the Potential Benefits and Risks of Tokenisation
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As opposed to bitcoin and other altcoins, tokens are a variety which can be categorized based on their purposes:
- Platform Tokens
Platform tokens utilize blockchain infrastructures to deliver decentralized applications (dApps) for different uses.
For example, while Dai is categorized as a stablecoin because it is soft-pegged to the US Dollar and its pricing maintained through mechanisms built into smart contracts, it can also be classified as a platform token because it is built on the widely used Ethereum blockchain.
Platform tokens benefit from the blockchains they build upon, gaining enhanced security and the ability to support transactional activity.
Platform tokens run the gamut of use cases, from serving gaming and digital collectibles (CryptoKitties!) platforms to global advertising and marketplace industries.
- Security Tokens
Security tokens are tokens that serve as direct, on-chain representations of real-world securities or tokens that are on-chain instruments serving a similar purpose for blockchain projects and/or digital assets.
In a case where a token represents ownership of an off-chain asset, such as real estate, equipment, payable invoices, or a business, similar to a share of stock, the security token’s value is directly tied to the asset’s valuation – the more valuable the asset, the more valuable the token.
- Transactional Tokens
Transactional tokens are used to transact – they serve as units of account and are exchanged for goods and services. These tokens often function like traditional currencies, but in some cases, provide additional benefits.
- Utility Tokens
Utility tokens are integrated into an existing protocol on the blockchain and used to access the services of that protocol.
They are not created for direct investment like security tokens, but can be used for payment of services within their specific ecosystems.
- Governance Tokens
Governance tokens fuel blockchain-based voting systems, as they are often used to signal support for proposed changes and to vote on new proposals. For example the Maker Protocol, has a governance token called MKR.
All of the different types of cryptocurrency tokens explained above serve specific purposes, and the uses for some can even overlap.
Defining each type is an important step toward offering a deeper understanding of how blockchain technology is used by organizations such as Maker to help individuals and businesses realize the advantages of digital money without experiencing volatility.
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RECOMMENDED READING: Understanding BEP-20 Tokens – The Token Standard for the Binance Smart Chain (BSC)
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