What is a token and what types exist?

Words like tokens and cryptocurrencies are arguably some of the most heard within blockchain technology. And they are a fundamental part of the construction of this ecosystem that is increasingly gaining strength. In today's article, we tell you what types of tokens exist and how they differ from cryptocurrencies. If you are interested, keep reading.

What is a token?

In the world of blockchain, a token is a digital representation of a valuable object in a specific context. It is issued by a private entity and is only valid under this specific universe.

Its operation is very similar to a miles plan within an airline. It is a good that does not exist physically, but that can be used if you want to purchase a plane ticket. The more miles you have, the better positioned you will be within the airline and the greater the possibility of routes you will have.

In the crypto universe they are represented through pieces of code that contain interchangeable information and, therefore, provide the connotation of money or a digital asset.

A token, then, can be used for different purposes beyond that of a form of payment: it can be used to pay for an object, to participate in an event, It can be anything that is reflected in the actual world, such as an entry into a game, a collection object, an action taken within a firm, etc.

Token Categories

All crypto tokens are divided into two categories: fungible and non-fungible tokens. Below we explain their differences.

Fungible Tokens (FT)

Fungibility refers to something that is consumed by use and can be replaceable. Fungible tokens (in English Fungible Token) then refer to those elements that we can change without problem.

If we go to the real world, it can be seen as a movie ticket. If I cannot attend, I can give it to someone else to use and this ticket will have the same value.

Non-fungible tokens (NFT)

Taking into account the previous definition, it can be deduced that a non-fungible token cannot be divided or exchanged with each other since it does not have the same value. A work of art does not have the same value as another and therefore, its exchange is not possible. This is a very helpful component to ensure the security of an asset's ownership and to confirm its legitimacy.

Crypto tokens, cryptocurrencies and altcoins: main differences

In many places, you will find that cryptocurrencies are often confused with tokens or altcoins. Below we explain their difference.

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Cryptocurrency

A cryptocurrency is a standard digital currency used to make or receive payments on a decentralized blockchain, the most popular being Bitcoin (BTCUSD). Its functionality is solely transactional, unlike other types of tokens.

Altcoin

Altcoins are all alternative cryptocurrencies that emerged after the success of Bitcoin. Ethereum (ETH), Litecoin (LTC), and Bitcoin Cash (BCH) are some common examples that came to compete and improve Bitcoin's weak points. However, it is this one that continues to have the greatest popularity in the market.

Crypto tokens

Cryptocurrency tokens are used to facilitate transactions. They are not self-sustaining, that is, they require a blockchain to operate, and they are generated in the format of smart contracts. These are what determine the operation and limitations of this particular token within blockchain technology.

Types of tokens in cryptocurrencies

Having a clear categorization of tokens and their meaning, we will tell you the different types of cryptocurrency tokens.

Utility token: Utility token

Utility tokens had their rise from the cryptographic projects that emerged in 2017 during the Bomm ICO. They are used to finance startups or projects with an established base in exchange for participation (either immediate or in the future). They are like an access route that confers certain types of rights to products and services.

Utility tokens are not intended as an investment — since they are not regulated — meaning that if the project grows, the investor will not have the right to its profits.

Security – Equity token

Contrary to utility tokens, security tokens are linked to financial securities and work similarly to the purchase and sale of shares. The security token is essentially a digital stock certificate that records your ownership on the blockchain.

Those who buy this type of token invest in a project with the expectation that its price will increase and provide current or future benefits.

Although security tokens do not usually give any voting power to investors, some platforms came up with the type of security token dedicated to it.

EQUITY TOKEN

The equity token is a type of security token that backs a traditional asset: be it a stock or real estate. This means that whoever owns it has a right of ownership, profits and voting over this asset.

Governance token

Acquiring this type of token gives the owner the right to participate in the decision-making of the project. It allows you to propose new features, request changes, make corrections and vote for or against other decisions involving the project.

With the creation of new Dapps, the governance token begins to play a fundamental role in achieving a balance between the decisions of shareholders and developers.

Governance tokens can be obtained in two ways: As a participation reward – granted by the DAO itself – for interacting or through purchase with cryptocurrencies. The more tokens, the greater the decision-making capacity.

Asset token

With the use of this token, you may support tangible assets like commodities, real estate, raw materials, and artwork, among others, to make the purchase and sale without having to travel.