Types of Token
It is a fact that cryptocurrencies and tokens are here to stay, and that their adoption and use are increasingly notable, so much so that along with other terms that have now become fashionable within the blockchain ecosystems, such as Metaverse or NFT, they are one of the most searched on the internet.
Some say that tokens, or rather tokenization, have the power to change the world as we now understand it—the way in which people and entities relate to each other—and, to be honest, I share this idea. But first, we are going to understand what tokens are and what types of tokens are most relevant today.
What is a token?
Surely the word token is not foreign or unknown to us, and in reality, tokens existed long before the appearance of blockchain technology, in fact, the word token comes from the Anglo-Saxon word "tacen,” which means sign or symbol. we could compare it to the term token.
As I said, before Ethereum appeared in 2015 or Bitcoin in 2008, we were already using tokens when, for example, our trusted store or supermarket gave us loyalty points for recurring purchases that we could later exchange for discounts on products.
Another example would be the chips that are used within a casino in order to use or participate in the games offered there. These tokens represent a currency such as the euro or the dollar. Therefore, we can understand that tokens are units of value issued privately in order to represent some type of asset, utility, right or obligation.
With the arrival of blockchain development, tokens adopted unique characteristics that catapulted them to an advantageous position, converting the assets they represent into more traceable, transparent, immutable and exchangeable units.
Tokens are digital units based on cryptography that live within the blockchain infrastructure. The great advantage they have is that they can represent almost anything we can imagine, from exclusive rights such as access or utility of a specific product or service, to financial instruments such as bonds, shares, debt issues, etc.
Depending on the purpose and what these tokens represent, they are divided into two large groups;
- Utility tokens
- Security tokens.
Benefits
Tokens offer a number of benefits in the realm of cryptocurrencies and blockchain technology. Below, we mention some of them:
Ease of transfer: Token Development is easily transferred between different parties through blockchain technology. This allows for fast and secure transactions without the need for intermediaries, such as banks or other financial institutions.
Liquidity: Digital tokens have a high level of liquidity, meaning they can be quickly converted into cash or other cryptocurrencies. This gives users the ability to exchange their tokens for other digital assets or even fiat currency, depending on their needs.
Access to global markets: Tokens allow access to global markets without geographical restrictions. Anyone with an internet connection can participate in token transactions, promoting financial inclusion and the democratization of financial services.
Security: Tokens use advanced cryptographic technology to ensure the security of transactions. Information stored on the blockchain is immutable and transparent, reducing the risks of fraud and data manipulation.
Asset Fractionation: Tokens allow for asset fractionation, meaning that a physical or digital asset can be divided into smaller parts. This facilitates investment and shared ownership of assets, which may have previously been inaccessible to many people.
Programmability: Some tokens, such as ERC-20 tokens on Ethereum, are programmable and can be used to create smart contracts and develop decentralized applications (dApps). This opens up a wide range of possibilities in terms of creating innovative services and solutions.
Token Types
There are 2 types of tokens that differ in that they are interchangeable and have the same value as each other, while non-fungible tokens are unique and indivisible. Below we leave you more details about each one:
Fungible Tokens
These are tokens that are interchangeable with each other and are identical in value and functionality. Each fungible token is considered equal to another and can be replaced by another token of the same type without making any difference. A popular example of a fungible token is Ethereum (ETH), which can be exchanged one for one without any distinction.
Non-fungible tokens
Unlike fungible tokens, non-fungible tokens are unique and indivisible. Each non-fungible token has unique characteristics that distinguish it from other tokens. These tokens are commonly used to represent unique digital assets, such as digital art, game collections, and virtual collectibles. A famous example of a non-fungible token is CryptoKitties, where each virtual cat is unique and has distinct characteristics that make them valuable and different from each other.
Utility and security tokens
Utility tokens, as their name suggests, refer to tokens that represent a utility, granting their owner the right to access products or services.Their price is dictated by the law of supply and demand, that is, they are not backed by any underlying value and are not intended to be used as an investment vehicle, although, as we can imagine, it is a fairly common practice.
Some of the uses of these tokens could be access to services such as decentralized cloud storage (SC), currency to purchase items or virtual lands (MANA), the right to be part of a decentralized community whose decisions are based on voting systems. and governance (REP), etc.
On the other hand, security tokens are linked to financial values, therefore, the acquisition intention is mainly for lucrative purposes, that is, to obtain a profit or profitability over time, and unlike utility tokens, their intrinsic value will be determined by the underlying asset.
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