In the exciting world of cryptocurrencies, there are several types of assets that play key roles in the ecosystem. From stablecoins, which seek to maintain a stable value, to platform-native tokens and synthetic tokens that represent real-world assets, each type of token has unique characteristics and plays a specific role.
We have already told you about the different types of blockchain networks.
In this article, we will explain the different types of tokens and how they contribute to the evolution of the crypto ecosystem. Read on!
Native tokens are tokens that belong to a specific blockchain platform and are used to access and use the services and features of that platform. These tokens are critical to the operation of the platform and can have various utilities, such as paying transaction fees, participating in governance and accessing exclusive features.
Notable examples include Ethereum (ETH), Binance Coin (BNB) and Cardano (ADA).
Stablecoins are tokens designed to hold a stable value, usually pegged to a fiat currency such as the US dollar. They allow users to access the benefits of cryptocurrencies without being exposed to the volatility characteristic of other cryptocurrencies.
There are several types of stablecoins:
They are issued and backed by centralized entities, such as companies or financial institutions. These include Tether (USDT) and USD Coin (USDC), which are backed by fiduciary reserves in bank accounts.
They are created and backed by decentralized mechanisms, such as smart contracts on blockchain. Dai (DAI) is a prominent example, as its backing is held by collateral in the form of cryptocurrencies on the Curve platform.
They use algorithms and automatic mechanisms to keep their value stable. Notable examples of algorithmic stablecoins are Ampleforth (AMPL) and Frax (FRX), which adjust their supply and demand to stabilize their price.
Synthetic tokens represent real-world assets, such as stocks, commodities or fiat currencies, within the blockchain environment. These tokens are created using smart contracts and offer users the ability to invest in traditional assets without having to physically own them. Notable examples of synthetic tokens include Synthetix and Mirror protocol. Synthetic tokens can track the value of underlying assets and allow exposure to various financial markets in a decentralized manner.
Security tokens are digital assets that represent ownership of a physical asset or a stake in a project or company, and are issued in compliance with the securities regulations of a specific jurisdiction. Unlike synthetic tokens, which may represent real-world assets but are not necessarily subject to securities regulations, security tokens are designed to comply with applicable laws to offer traditional investments and assets within the blockchain environment.
Security tokens are a type of cryptocurrency that represents ownership of an asset, such as a debt or equity instrument. They are usually issued by companies to raise capital, similar to how traditional stocks and bonds are sold in FIAT money.
Utility tokens are one of the types of tokens that give their holders access to a product or service. They are often used to finance the development of new applications based on the blockchain. Unlike security tokens as discussed above, which represent ownership of an asset, utility tokens have no intrinsic value.
The main difference between security tokens and utility tokens is their purpose. Security tokens usually reflect a real asset, we lend shares of a company, real estate..., while utility tokens are intended to provide access to a product or service.
A common example of utility tokens is Chainlink (LINK), which is used to pay fees for oracle services on the network.
Governance tokens give holders the right to participate in the decision-making process of a platform or protocol. These tokens allow holders to vote on proposed changes, influence policy and determine the direction of the platform. Notable examples of governance tokens are Compound (COMP) and Uniswap (UNI), which allow holders to actively participate in decisions related to their respective protocols.
Wrapped tokens are tokens within a blockchain that represent other tokens native to a different blockchain. These tokens wrap or "wrap" the original tokens and represent them on a different blockchain. For example Wrapped Bitcoin (WBTC) represents bitcoins (BTC) on the Ethereum blockchain. Wrapped tokens enable interoperability between different blockchains and facilitate the transfer of assets between them.
Due to the variety of token types there are many ways to invest using cryptocurrencies, from those who want to invest in real estate by buying securities, to those who give loans with stable coins to get returns with the commission they charge, to those who buy utilities hoping that the value of the token will increase as the platform grows in users.
All of these tokens require you to research them in depth so you can choose the ones that best suit you as an investor. Taking the time to delve into the technology behind each token, understanding its use case and assessing the strength of its team and vision can provide a more complete and informed understanding.
