What is a token in the cryptocurrency industry?
A token (or token in French) refers to any digital asset that can be transferred from one entity to another via a blockchain network.
As such, tokens exclude the use of an intermediary authority when they are exchanged and cannot be duplicated on the network.
We could complete this definition by characterizing tokens by their nativity. This is the reason why CoinMarketCap specifies that tokens are backed by pre blockchains -existing.
Moreover, from an operational point of view, a token can be assimilated to a programmable unit of value issued by an organization in order to stimulate activities of various kinds within its community.
Is there a difference between a token and a coin?
The use of the term “ coin ” (or coin in French) is very widespread in the crypto ecosystem. Some even use it as a synonym for the word “token”.
However, even if these two concepts are very similar in the sense of the collective imagination, we can establish certain peculiarities to distinguish them.
According to CoinMarketCap, the first distinction to be made is at the level of the origin of the crypto-asset .
Coins operate on their own blockchain (such as bitcoin or litecoin) while tokens operate networks already in place (such as chainlink or USD Coin).
✍️ The Ethereum blockchain is the fertility base par excellence of tokens since it hosts the vast majority.
Another differentiator to note is the use value of the relevant digital asset .
This is because wedges are needed to make the blockchains behind them work.
They can be used as currency (to send money, pay transaction fees, reward validator nodes) or as gas (to feed smart contracts).
As for them, tokens are generated with the aim of creating a more complete economy around the crypto products and services with which they are associated.
They exist mainly as symbolic representations aimed at providing additional functionalities that bring the experience of using these consumables closer to the real world (titles, collectibles, etc.) or improve it (protection of privacy, governance, etc.).
What are the different types of tokens that exist?
There are several varieties of tokens, differing either by their property (fungible or not), or by their functionality (utility tokens, security tokens, equity tokens).
Non-fungible tokens (NFT)
A fungible asset corresponds to an asset whose nature is not unique. This means that it can be substituted for any asset of the same kind.
Thus, a one euro coin can be exchanged for another without affecting the surrounding environment.
In contrast, a work of art is a unique product. It is a collectible item. It is therefore a non-fungible asset.
The Non-Fungible Tokens (or non-fungible tokens) are digital assets that meet this uniqueness criterion.
On Ethereum, they are associated with the ERC-721 standard. Moreover, it is Cryptokitties – a game hosted on Ethereum that consists of creating, collecting, buying and selling virtual cats – which popularized NFTs.
Today, many projects attempt to explore other use cases of these crypto-collectibles to apply them to various fields (artistic creation, real estate, patents, etc.).
👉 Find out more: The Guide to Crypto-Collectors and Non-Fungible Tokens (NFTs)
Utility tokens
As for them, utility tokens are used to access specific products or services .
Their operating principle is similar to that of tokens used in gaming rooms. To benefit from a service (playing poker for example), you have to convert money into credits that give access to it.
✍️ The ERC-20 standard is the most widely used utility token issuance protocol.
Although this is not their primary purpose, utility tokens can be the subject of speculation . This is because investors can get hold of it in the hope that more and more people will be interested in related services or products and that this interest will drive up the price of the token concerned.
Utility tokens are an effective fundraising instrument for companies that regularly solicit them as part of Initial Coin Offering (ICO).
✍️ An ICO is a fundraising model characterized by the fact that investors barter their cryptocurrencies for tokens issued by the initiator of the project to be financed.
It should be noted that utility tokens generally have a status relating more to the institutional framework than to the legal framework.
Security tokens
Another very popular category of tokens is that of security tokens. They are used by companies during Security Token Offering (STO) to gain investor confidence.
These are tokens that certify that you have invested in a project, without however granting you ownership of the asset concerned.
So you can expect to receive dividends if profits are made, but your investment will not give you any decision-making power.
The value of security tokens depends mainly on the level of achievement of the objectives set by the issuing company.
In order to protect investors, security tokens are more subject to the control of regulatory authorities .
✍️ In France, the Autorité des marchés financiers (AMF) wears this hat.
Equity tokens
They are assimilated to securities offering a legal holding right on assets such as real estate, stocks or bonds.
The operation of equity tokens is similar to that of products from the traditional stock exchange system . Thus, owning them involves all of the responsibilities of owning an investment.
Equity tokens are an effective digital alternative to traditional investment contracts, which are limited by a significant administrative slowness at the time of their establishment.
They guarantee fast payments, smooth cross-border transactions, greater access to liquidity and better transparency.
✍️ Currently, equity tokens, like security tokens, are based on the ERC-1400 standard.
Conclusion
As an investor in cryptocurrencies, it is important to become familiar with the different types of tokens and to understand their characteristics. This makes it possible to establish a strategy in accordance with its objectives and to better orient its investments.
We recommend that you read: 📍 What is crypto staking? 📍 What is a crypto Airdrop?
