Types of cryptocurrency tokens: definitions and features

By 2023, developers of blockchain projects have already released thousands of different cryptocurrency tokens that have unique characteristics and functionality. Tokens can be classified into several main types, each of which performs a specific task within a specific ecosystem or the crypto industry as a whole.

 

What types of cryptocurrency tokens are there? What are their features? What tasks do they perform? Read the answers to these questions in the article.

 

Cryptocurrency token: definition

A cryptocurrency token is a blockchain-based digital asset that represents value within a specific ecosystem. Tokens are used to access unique products and services, manage networks, facilitate transactions or receive rewards. The key difference between a crypto token and a crypto coin is that a token is developed based on an existing blockchain, while a coin is based on its own.

 

 

New cryptocurrencies are actively emerging in the digital space and contributing to the rapid development of DeFi. Among all types of tokens, there are several major ones: utility token, security token, stablecoin, NFT, payment token, and exchange token.

 

Utility token

Utility token is a type of crypto token that is issued by a certain platform to give its users access to unique functionality and benefits. Utility tokens can be sold, bought or exchanged for a specific use within a specific ecosystem.

 

 

Features

 

- Utilitarian value. The main value of utility tokens is the unique functionality within a decentralized platform or ecosystem that allows users to perform certain actions or provide access to premium features and products.

 

- Demand generation. Utility tokens create demand in the ecosystem by encouraging users to hold and use the token for various purposes, such as paying transaction fees, accessing exclusive content, or participating in token staking for rewards.

 

- Price volatility. The price of the utility token is volatile and depends on supply and demand dynamics, the popularity of the issuing platform, and general market indicators.

 

- Community participation. Utility tokens often contribute to the creation of a community of users who are interested in the success and development of the platform.

 

Security token

 

Security token is a digital alternative to traditional securities. It gives the holder ownership of an asset or a stake in a company and is a full-fledged investment instrument.

 

Security tokens are issued and traded on blockchain networks and have a value equivalent to external assets, such as company stock, real estate, debt instruments and bonds.

 

 

Features

 

- Regulatory compliance. Security tokens are subject to securities rules and laws in many jurisdictions.

 

- Ownership. Security token holders have legal ownership of the underlying asset, allowing them to receive dividends, profit shares or interest.

 

- Process automation. Smart contracts track compliance and automate dividend distributions, the exercise of management rights and other predefined functions.

 

- Global availability. Security tokens offer potentially wider market access and investment opportunities to a global audience because they are not constrained by geographic boundaries.

 

Stablecoin

Stablecoin is a type of cryptocurrency token whose price is pegged to a stable asset, such as fiat currency. The goal of their creation is to solve the problem of cryptocurrency price volatility and provide users with a stable digital asset. Stablecoins are designed to make transactions, store value and exchange assets in the crypto ecosystem.

 

 

Features

 

- Asset-backed. Stablecoins are backed by reserves of the underlying asset to which they are pegged. For example, fiat currencies, precious metals and other cryptocurrencies.

 

- Price stability. Stablecoins use smart contracts and algorithms to maintain price stability. They dynamically regulate the supply and demand of stablecoin based on predetermined rules.

 

- Potential for financial integration. Stablecoins facilitate cross-border transactions and can provide financial services to regions with limited banking infrastructure. They are faster, cheaper and more efficient than traditional fiat transfers. Stablecoins can also be used for storing value, credit, and payment for goods and services.

 

Non-fungible token (NFT)

 

Non-fungible token (NFT) is a unique cryptographic asset which cannot be replaced by another. It gives the holder the ownership of valuables, such as art, antiques, collectibles, or in-game items.

 

Each NFT has unique characteristics, ownership history and metadata, so it cannot be split or exchanged for another identical token.

 

 

Features

 

- Uniqueness and value. NFTs are unique and may have intrinsic value based on their scarcity or high demand.

 

- Transparency. NFTs are created based on blockchain technology, through which the ownership and authenticity of the token is further confirmed and transaction information is stored.

 

- Creator royalties. Creators can put royalties into NFTs using smart contracts. This allows them to earn a percentage of future sales on the secondary market.

 

- Secondary sales. A non-fungible token can be bought, sold and exchanged on specialized trading platforms. Buying NFTs can be seen as an investment, as many of them can increase in value significantly over time.

 

Payment token

Payment token is a cryptocurrency that is intended primarily for use as a payment for goods and services. Payment tokens function as digital currencies and facilitate online transactions.

 

 

Features

 

- Medium of exchange. A payment token is a digital form of currency that allows users to transfer value or make payments for goods and services.

 

- Decentralization. Payment tokens are created based on blockchain technology, eliminating the need for intermediaries and enabling direct peer-to-peer transactions.

 

- Safety. The use of blockchain technology also provides security and transparency of transactions, reducing the risk of fraud and manipulation.

 

- Availability. Users can make payments with payment tokens anywhere in the world, including areas where traditional banking is not available.

 

Exchange token

 

Exchange token is a type of crypto token that is designed to store value and invest. They are used within the ecosystem of a particular crypto exchange to pay transaction fees and services, as well as to access additional bonuses and benefits in the operation with exchange instruments.

 

The price of exchange tokens is determined by supply and demand dynamics, so they are susceptible to market volatility.

 

 

Features

 

- Investment asset. Exchange tokens are used to hedge risks and invest in a potentially growing asset.

 

- High liquidity. Exchange tokens are designed with high liquidity in mind, allowing users to buy and sell them quickly.

 

- Limited intrinsic value. The main value of exchange tokens is their market value, which is determined by market perception, supply and demand.

 

Summary

 

The crypto industry continues to evolve, stimulating the development of new technologies, solutions and methods. This contributes to the appearance of new types of digital assets and their popularization in society.

 

There is no clear classification of cryptocurrency tokens, but they can be classified into several main types, which have individual features and purpose. Understanding these features will help an investor navigate the evolving cryptocurrency sector and choose assets that solve assigned tasks.