In the cryptocurrency world, there is the term token, which is often considered the same as coin. However, tokens are actually different from coins by definition and function.
Coins are crypto assets that are used on their own blockchain. For example ether (ETH), operates on the Ethereum blockchain, Bitcoin (BTC) operates on the Bitcoin blockchain. While tokens are crypto assets that are made operated on other blockchains, such as USDC, tokens that are operated on several different blockchains.
Besides that, the function of a coin is usually to finance various transactions that occur on the blockchain. While the function of the token varies depending on what purpose the token is made for. The most common function is as currency in games and decentralized applications (DeFi).
Even so, each coin is usually a payment token, a type of token that functions as an alternative means of payment from fiat currency. And not all tokens are coins, not even all payment tokens are coins, because only some of them are the main currency in a blockchain.
Well, the token itself is usually classified based on its function. The following are the types of tokens that you need to know:
1. Non-Fungible Tokens (NFT)
Non-Fungible Tokens or often abbreviated as NFTs are types of tokens that represent certain objects, such as artwork, property ownership, in-game characters/items/properties and so on. This token functions as a digital asset that can be bought and sold through the blockchain platform. However, NFT cannot function as a means of payment in either GameFi or DApps.
Even so, that doesn’t mean that NFTs don’t have value. Many NFT projects have high value and become assets that are hunted because they are considered to be able to provide benefits through increasing value in the future. Some of the successful NFT projects include: Bored Ape, Nakamigos, Crypto punk and what is currently hotly discussed is PEPE the Frog.
2. Utility Tokens
Utility Token is a type of token that is used to gain access to the services that the developer offers. This type of token is commonly found on DeFi and GameFi platforms, such as exchange platforms whether decentralized or not. However, not only that, utility tokens can also be native coins from layer two blockchains that are used to solve problems on the main blockchain.
An example is the token Axie Infinity (AXS) which is used as currency in the popular game Axie Infinity. Then there are MATIC and ARB which are tokens for layer-2 blockchains (Polygon and Arbitrum) which are used to address the scalability and efficiency issues of the Ethereum network. Then there is SHUSHI which is the utility token of a decentralized exchange platform, SushiSwap and many others.
Use of utility tokens is generally limited to the platform on which they are developed. For example, SUSHI tokens can only be useful for financing exchange transactions on the Dex Sushi Swap platform. However, the tokens have a dynamic value which is also affected by market supply and demand. So, tokens like SUSHI are also very likely to have an ever-increasing value in the future and can be used as a profitable investment instrument.
StableCoin is a token that has a stable value so it is safe to use as a means of payment, because it is free from fluctuations in the well-known crypto market. This might happen because the value of stablecoins is pegged to fiat currency, gold or other cryptocurrency reserve funds, so the price of stablecoins will be relatively the same as the value of the assets that are the benchmark.
StableCoin is referred to as a token because it does not have its own blockchain. Usually, stablecoins are issued on more than one blockchain to widen their usage. However, some stablecoins are not decentralized currencies, especially for stablecoins pegged to fiat currency as well as precious metals. This type of stablecoin needs to be controlled because every token printed must have fiat currency/precious metal stored, so inevitably the process requires a third party to act as a custodian to store the underlying assets and issue tokens to the blockchain. Examples of fiat-pegged stablecoins are USDC, TrueUSD and USDT. Meanwhile, an example of a stablecoin pegged to gold is PaX Gold.
Meanwhile other types of stablecoins, such as those pegged to cryptocurrencies and which use algorithms to maintain the stability of their value, are types of stablecoins that are made decentralized and completely transparent. So that there is no party to become a Custodian and there is no need for audits either internally or externally like in fiat stablecoins and precious metals. An example of a cryptocurrency-backed stablecoin is DAI, while an example of an algorithmic stablecoin is Ampleforth.
4. Security Tokens
Security tokens or security tokens are tokens whose value is guaranteed by securities assets, such as stocks, bonds, mutual funds and property. This type of token is a digital version of the securities we know, which are usually traded via exchanges or capital markets.
By owning a security token, for example if it is a token that is guaranteed by the shares of a certain company, then the investor is also one of the shareholders in that company. So that he is also entitled to a portion of the profits generated by the company in its business activities. Likewise with tokens guaranteed by bonds, mutual funds and also property.
In addition, because security tokens or security tokens are also considered the same as securities assets in general, these tokens usually have to follow the regulations in force in the country where the company or property that is the underlying of the token is located. For example, if the token has an underlying asset in the form of company shares located in Indonesia, the token created must also comply with regulations from the Financial Services Authority (OJK).
5. Governance Tokens
Token Governance is a type of token that allows token holders to provide input or even determine the future of a cryptocurrency project, reject and accept development proposals, determine upper/lower limits on transaction costs and determine the allocation of funds to develop the project. The Governance Token is not used like a utility token which is used as a means of payment on a DeFi/GameFi platform. However, the Governance Token can be used as a guarantee to get service access from the platform.
Apart from that, governance tokens can also be traded on the secondary market, so that their value is dynamic depending on how high the level of demand and supply is on the market. An example of a governance token is MKR, the token of the MakerDao protocol which is a decentralized crypto lending platform.
6. Payment Tokens
Payment Token or payment token is a type of token that is made as a means of payment to buy goods/services. This type of token is different from utility tokens which are used to gain access to the services offered in a decentralized ecosystem. Payment Token is used as a means of payment like fiat currency.
Actually, every token as long as it can be transferred to a different account is very capable of being used as a means of payment like a payment token. What’s different is that utility tokens are focused as a tool to access services offered by decentralized platforms and ecosystems. Meanwhile, payment tokens were made from the start as a currency like fiat currency.
Examples of payment tokens are Bitcoin, Ethereum, Dogecoin, Litecoin, Bitcoin Cash and so on. These tokens are often also called native coins because they are the main currency in a blockchain. But not all payment tokens have to be native coins, payment tokens can also be StableCoins like USDT, USDC, TrueUSD which aren’t even decentralized, what’s important is that these tokens are made with the main purpose of being a means of payment like fiat currency.
7. Asset-Backed Tokens
Asset-backed tokens are a type of token whose value is guaranteed by physical assets such as gold, petroleum and property. This type of token has the same value as the value of the assets used as collateral. And represents ownership of the asset. So that this token can also be exchanged into a physical asset that is the guarantee.
At first glance, the understanding of Asset-Backed tokens does look the same as security tokens and stablecoins. However, Asset-Backed tokens have many differences from these two types of tokens.
Asset-backed tokens have a different purpose than stablecoins. These tokens are used to represent ownership of certain physical assets and are generally used as long-term investment instruments or traded in a decentralized ecosystem. While stablecoins are used as an alternative means of payment from fiat currency.
In addition, Asset-Backed tokens are also different from security tokens. Although there are many similarities, such as collateralized by traditional assets, they tend to be stable in value and used as investment instruments. But there are also many differences, such as Securities Tokens are considered the same as securities assets, such as stocks, bonds and so on. So to issue security tokens there are many requirements that must be met by companies to regulators. Meanwhile, Asset-Backed tokens can be issued by anyone who has access to assets that can be used as collateral for these tokens without having to comply with certain rules, such as issuing securities.
An example of an Asset-Backed Token is DIAM which is issued by diamDexx and is a token backed by physical diamonds. This token was created to enable retail and professional investors to buy diamonds through the silent Dexx platform and own high-liquidity assets that can be liquidated at any time when needed.
8. Loyalty Tokens
Loyalty tokens are blockchain-based tokens that become rewards from customer loyalty programs. This type of token is specifically functioned like loyalty points that are commonly used by companies in the customer loyalty programs they hold. The difference is that it is published on the blockchain, which means it has the advantages of being decentralized, secure and also transparent.
Loyalty tokens can be exchanged for discount facilities to purchase certain products, exchanged for cash/crypto prizes and other prizes depending on company policy. This token does not have a dynamic value like tokens in general, and is also not used as a means of payment to buy goods/services.
Loyalty tokens can be self-issued by companies that run customer loyalty programs. And it can also be issued by third parties who offer services to create customer loyalty programs. An example of a loyalty token is Nucoin issued by Nubank, the largest digital bank in Latin America. Nucoin is published on the Polygon network and will be distributed free of charge to users of their service.
So, those are some types of tokens that can be classified based on their function. Two of these tokens actually have almost the same function, namely Assets-Backed Tokens and Security Tokens. However, the Asset-Backed token itself is not only used as an investment instrument but can be used as a means to buy physical assets such as diamonds, gold, oil, rubber, soybeans and other raw materials. Meanwhile, pure security tokens function as blockchain-based investment instruments. So, that’s why the two are classified differently because they have different functions.
In addition, this classification also shows innovation in the wider use of crypto assets. So far, crypto may be synonymous as a means of payment and investment, but it turns out that its use is not only for that, for example, is a loyalty token that can be exchanged for certain facilities or prizes as a reward for loyal customers. Apart from that, there are also NFTs which are widely used as a medium for the commercialization of works of art, which so far have been difficult to find a market for.