What are the Different Types of Cryptocurrencies?
When looking to invest in cryptocurrencies, most of us prefer the popular names, including Bitcoin and ETH. But, having brief knowledge of cryptocurrencies, their underlying concepts and purposes, is a must to get successful output from your crypto investments. For instance, most people have no idea that there exist not one but multiple types of cryptocurrencies, with different basic purposes and use cases.
If you are looking to know more about cryptocurrencies, start with this article about the types of cryptocurrencies.
When we talk about cryptocurrencies, coins and tokens are the common terms we use. Most people use the two terms interchangeably like they are the same thing. But, they are not. There is a clear difference between a coin and a token. A coin is created to act as a digital currency and to be used as one. A token, on the other hand, is usually created to serve a specific purpose for a particular project or platform.
What is a cryptocurrency token?
A cryptocurrency token is a digital asset with the built-in ability to be used as a medium of exchange for other tokens created on the same blockchain.
When talking about the types of token, it’s important to know that a token can be made to have features of two or more categories, which means these types are not exclusive.
Here are the different types of crypto tokens:
1. Transactional or Currency Tokens
These tokens have monetary value and can be used for the exchange of things within the ecosystem for which they are created. Same as traditional currencies, these can be used for making digital payments. For example, the Libra Coin or LC is a digital payment currency created for the Libra Ecosystem users and participants to allow seamless cross-border payments for e-commerce. However, there are also transactional tokens that cannot be used as currencies.
2. Utility Tokens
As the name suggests, these tokens are created and used for a particular utility. For example, a blockchain project looking to create a new type of product will develop a utility token to grant access to that particular product. In other words, these tokens can be used to pay for specific products or services for which they are created. For example, LC acts as a utility token for the Libra Ecosystem users, granting access to the various products and services of Libra.
However, utility tokens cannot be used as global currencies for making digital payments.
3. Platform Tokens
Platform tokens are similar to utility tokens, but they are associated with blockchain technology and created for particular decentralized apps (DApps) and may have different uses, ranging from payments to utility and others. Platform tokens usually get their features from the underlying blockchains they are built upon, which means they are secure and can be used for a variety of use cases across industries.
4. Security Tokens
Security tokens are relatively easier to categorise. The value of such crypto tokens is generally associated with an underlying security or asset such as ownership interest in a company, hold, real estate, and others. The reason for the creation of security tokens was to regulate cryptocurrencies and control their volatile nature by linking their values to real commodities or assets. Basically, a security token is a blockchain-based representation of a real-world security like a bond, a property or shares in a company.
Tokenization of real-world securities can increase liquidity and make them more accessible to small investors.
5. Governance Tokens
Last but not the least, governance tokens are created to effectively manage voting systems and rights in a company. One use case of governance tokens would be to grant access to the company shareholders for voting in the decision-making process. As a blockchain-based voting system, they bring security and transparency in how decisions are made.
So, that’s all you needed to know about the different types of crypto tokens. However, it would not be wise to say that there will never be other types. As the world of crypto is evolving, so are the types and uses of cryptocurrencies. Make sure to know the type of token you are investing in and the purpose it serves.
