Since Bitcoin (BTC) was launched almost a decade ago there has been tremendous growth in the cryptocurrency space. Initially, blockchain technology revolved around digital currencies but it has grown beyond that to encompass a wide range of use cases so that it is no longer just a simple decentralized system of making peer-to-peer payments. As a result of this, the kinds of digital tokens have increased in number and some of them are listed below.
The 5 kinds of digital tokens are:
- Virtual currencies
- Utility tokens
- Equity tokens
- Asset tokens
- Reward tokens
Cryptocurrencies are obviously the best-known kinds of digital tokens with some of the popular ones being Bitcoin and Ethereum (ETH). Virtual currencies are built on a blockchain or a distributed ledger technology and this serves to facilitate fast and easy peer-to-peer transactions.
Bitcoin’s alternatives go by the name of altcoins and they were developed to compensate for the features that Bitcoin was lacking. Litecoin (LTC) for instance is capable of faster transactions and lower fees compared to Bitcoin. Monero (XMR) on the other hand focuses on privacy and thus both the transaction amounts and addresses are kept entirely private.
As interest in cryptocurrencies grows more altcoins are expected to come up and offer features that Bitcoin does not possess further driving innovation in the crypto space.
Other names by which utility tokens go by include network access tokens, user coins, and app coins. Typically utility tokens are distributed via Initial Coin Offerings at the time of a project’s launch.
The purpose of an ICO is to raise funds to be used in development. The user is also granted the right to use the service or product that will be developed from the proceeds of the ICO. In some cases for instance holders of utility tokens are given a voice in the decision-making process of an ecosystem and they can exercise this by voting.
With equity tokens, buyers of the tokens acquire part ownership in a certain project. Equity tokens are also distributed via Initial Coin Offerings and can essentially be linked to shares that are acquired during an Initial Public Offering.
Equity tokens are also referred to as tokenized securities or security tokens. Following recent ruling equity, tokens are now under the regulatory authority of the U.S. Securities and Exchange Commission. They are thus supposed to meet the conditions and requirements as set out by the U.S. Securities Law.
Another name for asset tokens is asset-backed tokens. By definition, these are digital tokens that are utilized to substitute or signify a physical asset. Their purpose in the physical asset market is thus to enhance the level of security.
Though it is easier to purchase physical assets using asset tokens they are not popular due to the fact that each token’s price is tied to the physical asset it is associated with.
Reward tokens also go by the name of reputation tokens. As the name suggests these tokens are used to signify the standing of a user within a particular ecosystem. These tokens are thus acquired based on participation.