Tokens are units of value that operate on existing blockchains like Ethereum and Polkadot but are usually unrelated to the consensus mechanisms or security. The blockchains provide the infrastructure. Think of tokens as apps on a phone and the blockchain as the operating system.
Tokens are built using smart contracts to perform a variety of tasks without the need for a third-party intermediary. The smart contract will hold all the necessary information about a token's properties. Their use cases can extend beyond cryptocurrency into traditional industries and applications.
A majority of cryptocurrencies in the current market are technically tokens which fall into several categories:
- Utility Tokens: These provide users with a product or service. They can serve various functions within their native platforms. Ethereum's ether, for example, powers its platform and is a utility token.
- Security Tokens: Representing ownership in an external asset or company, these tokens are similar to traditional securities. They often promise dividends or revenue shares. Due to the nature of the tokens, issuance and trading must be controlled and governed by financial regulators.
- Exchange Tokens: These are used as a medium of exchange to incentivise trading and typically offer cheaper fees and voting rights on the platform. Examples include Binance Coin (BNB) and Huobi Token (HT).
- Non-Fungible Tokens (NFTs): Unique digital assets verified using blockchain, NFTs represent ownership of a specific item, usually digital art or collectibles, rather than an interchangeable unit of value.
- Decentralised Finance (DeFi) Tokens: These exist on decentralised financial platforms that operate without intermediaries. They often represent governance rights or can be staked in protocols to earn interest.
- Asset-Backed Tokens: These represent a claim on an underlying asset, such as gold or real estate. They convert the value of a tangible, physical asset into a digital token, providing liquidity and easier transferability.
- Stablecoins: With the inherent volatility of cryptocurrencies, stablecoins emerged as a solution. Pegged to stable assets, often traditional currencies like the US Dollar, their value is intended to remain relatively constant. Examples include Tether (USDT) and USD Coin (USDC).
- Privacy Tokens: Prioritising anonymity and privacy beyond what most cryptocurrencies offer, these tokens obscure transaction details. Monero and Zcash are popular examples where transaction amounts, senders and recipients are encrypted.
