What types of crypto tokens exist?

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Last time, we tried to give you an accessible and quick explanation of what crypto tokens are and the main differences with crypto coins. Now that you're an expert on the topic, you might be asking yourself some questions. How many types of crypto tokens exist? What can I use them for? Do some tokens have multiple uses?

Keep in mind that there are several subcategories. Still, because the subject is so new, sometimes tokens change their name depending on who is talking about them. Potentially every exchange or creator could make its own classification. Here, you can find some of the most well-known token types.

Photo by Olya Kobruseva from Pexels

Platform tokens 

They are designed to support a decentralised application (dApp) on the blockchain. For example, the Uniswap protocol is a decentralised application that allows users to swap different types of Ethereum tokens with other Ethereum tokens through the use of smart contracts. They have their own token, the UNI token. In the beginning, it was mostly given to those who invested in the Uniswap protocol. It’s also known to be a governance token, but we’ll dig into that in a bit.  

Security tokens 

Security tokens are supposed to represent ownership of another asset, usually traditional ones, like stocks or real estate. Let's say you want to buy gold, but you don't want to actually own the gold. Someone could create a token that changes its value according to the price of real gold. Instead of owning the gold, with a token, you own a representation of it. They are supposed to be much safer because it's way harder to hack an Ethereum token than break into someone's house. The problematic part is that there needs to be an actual asset corresponding to the token you own. A fraudster could create a token and ask people to invest in it without having any real gold. 

Transactional tokens 

They are used as an easy and fast way to transfer money. They often function like traditional currencies but, in some cases, can provide additional benefits. Usually, these tokens have ridiculously cheap transaction fees that allow people to do a large number of transactions, making it more affordable than using traditional systems like banks or Paypal. 

Utility tokens 

Utility tokens have a value tied to their ownership. They're not created for direct investment like security tokens. Still, they can be used to pay for services within their specific ecosystems. Security tokens are just a way to store money; you just buy them and hold them. Utility tokens, on the other hand, can actually be used for commercial intent. 

Examples of utility tokens available on the Vivid catalog include Golem and Basic Attention Token

To let you better grasp this concept, I would like to take a step back and explain to you the idea behind the Basic Attention Token, a utility token that can be used to advertise on the Brave browser. 

The team behind this token wanted to focus on creating a simple system to reward online creators. That's how they came up with the idea of the Brave browser which is a web browser (like Google Chrome) focused on privacy. But, it’s also a blockchain-based digital advertising platform. 

It works in a way that allows publishers of online content to earn considerable revenue, while advertisers get a valuable audience for the money they spend on ads. Users can activate or deactivate the possibility to receive ads. When clicking yes, they can choose how many ads they want to see, and these are better targeted to their needs. Creators will still get compensated for their work when signing up for the creators' program as Brave users. And that's where Basic Attention Token (BAT) enters the game. 

BAT is the native utility token of the Brave browser, and its purpose is to offer a better solution in digital advertisement. How does it work? Advertisers buy BAT to spend them on advertising. Then, the tokens they spend are given to the users who choose to view ads and to the creators of the content where people see these ads. Easy, right?

Non-Fungible Tokens (NFTs) 

NFTs are the most hyped up tokens right now. They are unique (non-fungible), can't be exchanged for another item and represent ownership of unique items, usually digital art. Consider them as a certificate of authenticity when talking about artworks on the internet. We extensively wrote about them here

Governance tokens 

Governance tokens allow token holders to vote on specific things, like the future of a protocol or an application. Protocols are usually decentralised and have no boards of directors or central authority, making tokens extremely useful if big decisions are needed. The UNI token, the governance token of the Uniswap protocol, is part of this group. 

Hypothetically, UNI Token holders could choose to raise the fees of the Uniswap trade from 0.3% to 0.7%, and everyone owning a token would be allowed to vote on that matter. This means that your voting power will increase based on how many tokens you own. This is an excellent reason to own a lot of tokens as it will give you more control over the platform, but it also opens the debate of whether the authority is centralised or decentralised. 

Even if you're only investing in crypto and are not interested in owning your assets, knowing the projects behind each cryptocurrency or crypto token can help you understand where you want to put your money. Knowledge is the key to creating your own investment strategy. Don't get yourself fooled by hyped coins or tokens, and use your time to investigate, diversify and explore. This could make a difference between losing a lot of money or making a lot of money, and we know on which side of the table we all want to be.  

Any opinions, news, research, analyses, or other information contained on this website are provided as general market commentary, and do not constitute investment advice, recommendations nor should be perceived as (independent) investment research. The author or authors are employed by Vivid and may be privately invested in one or several securities mentioned in an article. Vivid Invest GmbH offers as a tied agent of CM-Equity AG the brokerage of transactions on the purchase and sale of financial instruments with the exception of those in the area of foreign exchange brokered by Vivid Money GmbH.

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