Coins, Tokens and Classifications
So, youve decided to learn about cryptocurrency. Well done! Prepare to journey down the rabbit hole and discover the potential of this truly amazing technology. With time you will begin to understand the intricacies of consensus mechanisms, blockchain types, side chains, plasma chains, valuation methods and more. However, for today, lets just focus on understanding the difference between a coin and a token and analyse the different types of available tokens in the market. Understanding these differences is truly imperative to any investment strategy and a great place to start.
In a general sense, a cryptocurrency coin is an encrypted digital currency meant to be used as a form of payment. It represents a unit of value that is used within its own blockchain and is independent of any other platform. Its two main uses are to store value and pay for goods and services. Essentially, think of it as a digitalised currency.
The most popular and known cryptocurrency coin is Bitcoin (BTC), which was released by alias Satoshi Nakamoto in 2008. Nonetheless, there are now over 1600 coins available for trade. Many of these coins are referred to as altcoins, as they simply represent an alternative to Bitcoin.
Many altcoins are a fork off Bitcoin and were developed using BTCs open source protocol. Examples include Litecoin (LTC), Dogecoin (DOGE) and Namecoin (NMC).
However, there is also a long list of coins that have derived their own blockchain independent of Bitcoin. Examples include Ethereum (ETH), Ripple (XRP) and Cardano (ADA).
Tokens are used to represent digital assets that are fungible and tradable. The major difference between a token and a coin is that a token does not run on its own blockchain. Instead, tokens are hosted by an existing blockchain.
Tokens offer functionality above and beyond that of a coin. While they can be used as a medium of exchange they also give the holder the ability to participate in some kind of activity. For example, the Binance Coin (BNB) is used to facilitate operations on the Binance platform a cryptocurrency exchange. The BNB coin is used to pay transaction fees, withdrawal fees, listing fees and all other transaction expenses.
Tokens are usually distributed and bought through Initial Coin Offerings (ICOs), which are form of crowdfunding. Some popular tokens include Tron (TRX), OmiseGo (OMG), Augur (REP) and Golem (GNT). Ethereum is the most popular platform for token development, however; Omni, Neo, Waves and Qtum also offer the ability for token creation.
Types of Cryptocurrency Tokens:
Cryptocurrency tokens can also be broken down by category. These include, digital currencies, utility tokens, equity tokens, asset tokens and reputation tokens.
Digital Currencies are digitalised assets that run on an existing blockchain and are used as a form of payment and storage of value. Because the purpose of digital currencies is practically identical to that of coins they are usually considered in the same class. This is the first and only exception when distinguishing between coins and tokens.
Digital currencies are based on distributed technology and facilitate efficient peer-to-peer (p2p) transactions. Bitcoin was the first digital currency and remains the most well known, representing about 54% of market share. However, some initial technical limitations within the Bitcoin blockchain protocol caused other digital currencies to enter the market. These currencies have slightly altered code with the aim of fixing some of Bitcoins inefficiencies.
For example, LTC can process transactions quicker and at a lower cost than the Bitcoin Blockchain and Monero (XMR) utilizes code that allows for transaction amounts and addresses to remain completely private.
Utility tokens are used to run operations within a blockchain infrastructure, they give the holder the right to use the platform. Blockchain projects that provide a particular service may require utility tokens to function.
Utility tokens are also referred to as app coins, user coins or network access tokens. An example of a utility token is the Basic Attention Token (BAT). This token is designed to be used as a payment medium within the brave browser in the context of advertising. Users, publishers and advertisers use the BAT token to interact with one another. For example, holders can use the BAT token to access premium articles and products, purchase high quality photos and data as well as send donations.
Equity tokens provide the holder with partial ownership in a project. They are analogous to owning shares in the stock market and often come with voting rights.
These tokens are also known as security tokens or tokenised securities. These tokens fall under the purview of the SAC, and therefore are subject to US Securities Law. For investors, equity tokens may be a desirable asset class because it gives them ownership and voting rights in the projects development.
Asset tokens, also known as asset backed tokens, are digital tokens used to represent ownership in a physical asset. They provide value by adding security to the physical asset market.
The Goldmint project, for example, uses the blockchain to digitalise gold assets and to issue its assed backed token.
Reputation tokens (otherwise known as a reward token) represents a users status within an ecosystem. It is possible to gauge if a user is likely to be trustworthy based on the number of reputation tokens they possess. Users typically acquire tokens based on their participation in a blockchain platform.
A common example of a reward token is Steem (STEEM), which is issued with the Steemit social media and content creation platform. As users post content and interact with other users on the platform they acquire STEEM tokens, which they can then use to trade for other cryptocurrencies on exchanges.
Well, there you have it. You are now well on your way to being an expert in cryptocurrency. You have learnt the difference between cryptocurrency coins and tokens and how to analyse the different types of tokens. See you next time!
Disclaimer: This is not intended investment advice. Please do your own research before investing. The nature of cryptocurrency is inherently speculative so only invest what you are prepared to lose.