Everything you need to know about coins and token types.
Coins are native cryptocurrencies that run independently on their dedicated blockchains, separately from other cryptocurrencies, blockchains, or platforms. Coins like Ethereum (ETH), Bitcoin (BTC), and Binance Smart Chain (BNB) are examples.
Coins are mostly used as a store of value and a medium of exchange. They may be accepted as a form of payment more widely because they are intended to be used as digital currency for transactions.
Native currency is comparable to auto gasoline. Native coins are necessary to operate their particular blockchain networks, just like cars need fuel. Transaction fees are covered by native coins, which are also used to speed up transactions and reward network users. Native currencies power the functions and activities within a blockchain ecosystem, just as fuel runs an automobile’s engine.
Tokens are a more general term for different digital assets on specific platforms. Typically, tokens are developed and run on already-existing blockchain platforms, making use of their standards, infrastructure, and protocols, such as Ethereum or Binance Smart Chain.
While the phrases “token” and “coin” are commonly used synonymously in the cryptocurrency space, they have distinct meanings that change according on the situation.
Recall that you must own the native cryptocurrency (coin) of a given blockchain in order to participate in transactions involving tokens issued on that particular blockchain. This necessity results from the fact that the native token of the blockchain must be used to pay transaction fees, which are incurred during transaction activity.
The blockchain platform on which tokens are based frequently defines specific token standards that tokens must follow. These standards provide parameters for token functioning and interoperability.ERC-20, the most extensively used token standard for fungible tokens, ERC-721, the token standard for non-fungible tokens, and ERC-1155, a hybrid token standard for fungible and non-fungible tokens within the same smart contract, are a few popular token standards or protocols on the Ethereum blockchain.
While tokens can have many uses, the most popular kinds are security and utility tokens.
The main criteria used to categorize tokens is their usefulness. Utility tokens and security tokens are the two main categories.
Tokens can alternatively be categorized as fungible or non-fungible according to their characteristics. Tokens that are fungible, like dollar bills, are interchangeable with other tokens of the same value. Every unit serves the same function. Non-fungible tokens, on the other hand, such as one-of-a-kind artwork, have unique characteristics and need to be handled individually.
Utility tokens are primarily used to give consumers access to and use of particular features, goods, or services provided by a platform or application that is built on blockchain technology. Utility tokens are unique to the platform they are utilized on and are generated on a blockchain.
Within the platform, utility tokens are often used as a means of trade or transaction that allow users to pay for goods, services, or access rights. They cover a variety of features, such as but not restricted to:
- payment for goods or services obtained within the ecosystem of the platform,
- entry to unique features, premium content, or restricted sections on a platform,
- engage with decentralized apps (dApps) or gain access to particular features like staking, voting, and taking part in governance processes,
- Loyalty rewards, which encourage users to interact with a platform by providing advantages, rebates, or other incentives.
It is important to note that utility tokens’ value is still susceptible to fluctuations due to supply and demand dynamics, even when their primary purpose is functional. It’s crucial to remember, though, that utility tokens aren’t typically marketed or offered as investment options since, unlike security tokens, they don’t reflect ownership or grant profit-sharing rights.
A digital representation of conventional securities, such as bonds, stocks, or a combination of the two, is called a security token. Standard securities comprise stocks, bonds, exchange-traded funds (ETFs), options, and futures. These securities can be exchanged digitally by being tokenized to form security tokens.
Financial assets known as security tokens have features similar to those of conventional securities. For example, a business may offer tokenized shares that grant holders dividends and ownership rights during an Initial Coin Offering (ICO). These tokenized shares are equal to traditionally dispersed shares in terms of legality.
Owners of security tokens stand to gain from the token’s performance as well as potential dividends in the form of more tokens. They might also benefit from other perks like the ability to vote. Security token owners can profit in a manner akin to that of stockholders and holders of traditional securities.
It’s crucial to remember that different jurisdictions may handle security tokens differently in terms of regulation.
Stablecoins are digital currencies that are intended to hold their value steadily over time. They are usually correlated with well-known fiat currencies like the US dollar, a group of fiat currencies, or even valued commodities like precious metals. Stablecoins are designed to reduce price volatility and prevent large fluctuations in their value.
Similar to traditional fiat currencies, these coins are backed by an underlying asset, usually the one they represent digitally, to keep their value steady.
Stablecoins come in four primary varieties:
1. Stablecoins that are collateralized by fiat currency reserves, including USDT, USDC, and BUSD.
2. Stablecoins like DigixGlobal that are collateralized by commodities, such as gold.
3. Stablecoins backed by other cryptocurrencies, like MakerDAO’s Dai token, which are named after their cryptocurrency counterparts.
4. Stabilized currencies without collateral rely on algorithms to regulate the quantity of tokens issued and uphold a predetermined value. The amount of these coins in circulation varies according on market conditions.It is required of businesses who issue collateralized stablecoins to possess the gold or US dollars that support their coins. They follow a 1:1 ratio when creating new tokens, based on the value of their holdings. A popular model for the majority of stablecoins is this one.
Stablecoins are designed to offer consistency and dependable value in the erratic world of cryptocurrencies.
Digital tokens known as “asset-backed tokens” are tokens that mimic physical commodities like gold, crude oil, real estate, stocks, and soybeans. These tokens’ worth is directly correlated with the value of the tangible object they stand in for. Financial regulators usually classify these tokens as securities.
The possession of an asset-backed token entitles you access the associated physical asset. You might also anticipate future profits if the asset increases in value, depending on the asset. Transactions are more effective and economical when tokens are used since they facilitate ownership transfers without requiring the actual movement of assets.
Asset-backed tokens can be used by companies to raise capital if they comply with financial standards and are offered as equity instruments. As an alternative, current assets can be tokenized and offered to private buyers, giving them the chance to make real-world investments without having to deal with the difficulties of exchange or storage. This lowers the cost of logistics and trade friction.
In response to issues brought on by volatile currencies or erratic stock markets, asset-backed tokens offer an alternative financial option that blends digital liquidity with the value of physical assets. With them, investors can hold value apart from the volatile traditional fiat currencies.
Developers created governance tokens especially to allow token holders to actively participate in a protocol’s or project’s development and decision-making processes. Decentralized autonomous organizations are organizations that support user control (DAOs).
Holders of governance tokens can propose new features or alter the governance system itself, giving them the ability to have a say in project decisions.
Governance tokens offer a more equitable, decentralized, and transparent method of governance in the context of DAOs and decentralized finance (DeFi). These systems create trustless environments for transactions and information sharing by using smart contracts to carry out activities based on predetermined circumstances. Members of DeFis and DAOs can participate equally in the decision-making process by using governance tokens.
The rules and models governing the operation of governance tokens vary throughout projects. Using particular computation techniques, tokens are distributed to various people or organizations participating in a project. While some governance tokens cover a wider variety of decisions, others concentrate on voting on particular governance concerns.
A Non-Fungible Token (NFT) is a digital token that uses cryptography to give tamper-proof, verifiable proof of ownership and authenticity of a particular asset.
Although NFTs are most commonly associated with virtual artwork, they have other uses as well. A vast array of assets, including as expensive watches, real estate, event tickets, domain names, and intellectual property, can be represented by NFTs.
According to their traditional nature, cryptocurrencies can be exchanged, meaning that, for instance, each unit of Ether is precisely the same as another.
Another essential feature of conventional fiat currencies like the USD is interchangeability. Tokens may, nevertheless, in some circumstances be distinct and non-transferable, particularly in situations where they serve as digital evidence of asset ownership.
An NFT is a virtual token that uses encryption to offer independently verifiable proof of ownership and authenticity of an asset. For example, you can tokenize a virtual artwork you possess by creating an NFT, which will represent your ownership of the original piece of art. The NFT serves as your ownership certificate and is kept on the blockchain.
Every blockchain technology that is currently in use has testnets that offer a trial version for testing. Testnet tokens, as their name suggests, are a special kind of cryptocurrency designed exclusively for testing.
To test out new features and functionalities without jeopardizing tokens with actual value, testnet tokens are utilized. They offer a risk-free approach to learn about blockchain technology without having to worry about losing real money.
These coins can be obtained by participating in blockchain development projects or are frequently given away for free through internet faucets. Once you have them, you may use them to play around with wallets, transact, and even interact with blockchain-based decentralized applications.
It’s crucial to remember that testnet tokens are worthless. They are not meant for real transactions; rather, they are just meant for testing and development. Testnet-generated tokens cannot be swapped for their main network equivalent.