In this article, we are going to dive deep into the various types of tokens available within the crypto industry. Plus, we’ll explore the variety of use cases for a utility token and the difference between these and equity tokens. Finally, we’ll discuss several other popular token categories and their utility and value within the industry.
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Exploring Different Token Types
Before diving into different token types, let's first explain the difference between crypto tokens and coins. Every cryptographic asset operates on top of a blockchain network. The asset native to the blockchain network is, strictly speaking, a coin. For example, Bitcoin (BTC), Ethereum (ETH), Solana (SOL), and Cardano (ADA) are all, technically, coins as the primary asset of the respective blockchain. Conversely, any cryptographic asset created on top of an existing blockchain network is a token. Examples include Basic Attention Token (BAT) as an ERC-20 token on Ethereum, PancakeSwap (CAKE) as a BEP-20 token on BNB Smart Chain (BSC), and Serum (SRM) operating using Solana's SPL token standard. Moreover, tokens can have multi-chain features with interoperable token standards for compatibility across numerous blockchain networks.
So, tokens are cryptographic assets running on top of another blockchain project. Further, we can categorize the thousands of existing crypto tokens into many different categories. For example, you could class tokens within a specific network (i.e., Avalanche ecosystem tokens) or class tokens with similar functional properties (e.g., smart contract platform and play-to-earn tokens). As the crypto industry expands, so too does the individual properties and use cases for tokens in innovative up-and-coming projects.
What is a Utility Token?
The open-source permissionless technology powering blockchains and respective assets means anyone can create a token. As a result, there are thousands of cryptocurrency projects available. However, just because a token exists doesn't mean it's valuable. The value of a token or cryptographic asset is often based on its supply and demand, but arguably more important is the utility of the token. There are many different operations and roles tokens can employ. Moreover, tokens that cater to specific needs within blockchain networks can collectively be categorized as "utility tokens".
Utility tokens, at face value, operate just the same as any other cryptocurrency. You can buy, sell, and trade a utility token on any cryptocurrency exchange (if the exchange list the token). Moreover, investors can purchase a utility token and HODL (hold on for dear life) for the gains without executing any utility token functions. However, most utility tokens execute a tokenomic design that is more profitable for partaking in platform activities and utility token operations than merely holding the token.
Utility Token Use Cases
Utility tokens can hold a single or a range of different functions. A "multi-utility token" is a cryptographic asset that holds multiple features and use cases. Utility tokens are often critical to the security and smooth running operations of a decentralized project. As such, instead of a project running from a small centralized party, utility tokens enable projects to operate at a globally distributed level with a focus on decentralization.
Governance
A popular utility token use case presents holders with governance rights over certain platform-specific operations. Each blockchain project has its own governance infrastructure with individual defining parameters. However, more often than not, decentralized governance includes the requirement of a utility or governance token. Some projects operate such that one token equates to one vote. Often, token holders will need to stake their assets within a governance protocol to be able to vote on updates for a platform. Other times, projects require a minimum amount of tokens staked to be able to cast a single vote. Moreover, every project operates differently.
Offering governance rights with a utility token is a valuable feature as society evolves toward a more decentralized world. It allows for a project to evolve and grow with its users at its heart and reward participants for their loyalty and commitment. Decentralized governance is a positive way to facilitate accessibility, growth, and sustainability for a blockchain project.
Network Security
Another critical use case for a utility token is ensuring network security in a proof-of-stake (PoS) blockchain. The first-ever blockchain (Bitcoin) and many proceeding projects use a proof-of-work (PoW) model that is computationally intensive. PoS was introduced as an alternative to PoW, which requires nodes to stake assets to partake in network consensus activities instead of expending copious amounts of energy as with PoW. As a result, PoS chains use over 99.9% less energy!
In addition to saving energy, PoS consensus models are more secure than PoW, with no susceptibility to a 51% attack. Also, many projects allow utility token holders to stake and delegate their holdings to existing validator nodes. As such, holders of a project's utility token can contribute to the network's security without meeting the criteria and demands of being a full validator. Thus, every holder of a PoS project's utility token has the potential to influence the strength of the network.
Gas Fees and Transaction Fees
There are generally two additional payments in transactions to consider in the crypto industry: gas fees and transaction fees. If you are executing a smart contract function, directly interacting with a blockchain (i.e., sending a transaction), computational energy will be required. As a result, users must pay a small gas fee or platform fee to cover the necessary energy. Any remaining profits are sent to the validating node/miner that confirmed the transaction. In addition, if users interact with a decentralized or centralized application, this may involve a small transaction fee with any trades. This is primarily to cover the profit margins for the development and sustainability of an app.
Another great feature of utility tokens is the ability to reduce or remove the cost of certain fees across different platforms. Each project can set its own parameters regarding the fee exclusivity when users hold its utility token. Some projects offer users a reduction on trading fees with a utility token, with a higher reduction the more tokens a user holds. Alternatively, some platforms may remove (or cover) the cost entirely of transaction fees for its utility token holders.
To learn more about how gas fees work within a blockchain, dive into our Ethereum Fundamentals course at Moralis Academy!
Identity/Exclusivity
Utility tokens are publicly transparent, secure, and have an immutable transactional history. Therefore, utility tokens can allow project organizers to determine their most loyal and engaging users. This can significantly assist marketing and public relations (PR) campaigns with real-time insights into operational activities. In addition, utility tokens can help projects automate perks and rewards for their most devoted users.
For example, projects can set parameters such that holders receive perks after staking "x" amount of tokens or staking for "y" amount of days. Alternatively, holders of a project's utility token could gain exclusive access to events or activities. Some projects automatically place utility token holders within airdrop giveaways or allow users to trade their tokens for lottery tickets (e.g., PancakeSwap). Also, holding a utility token could give users a discount when purchasing assets from a non-fungible token (NFT) marketplace.
What is an Equity Token?
Now that we understand the variety of use cases a utility token can hold, let's explore how this differs from equity tokens. Utility tokens and equity tokens are sometimes referred to interchangeably; however, this is not strictly accurate. While utility and equity tokens share similar properties, there are also fundamental differences between the two. First, public company utility tokens are distributed through initial coin offerings (ICOs), whereas equity tokens use an equity token offerings (ETOs) distribution model.
Equity tokens are a form of security token representing equity in an underlying asset (usually a stock or share), digitally inscribed into a blockchain. Moreover, as within the legacy infrastructure, contractual terms and conditions are set within the equity token itself. For example, holding an equity token could enable one to have governance, subscription, or entitlement rights over the underlying asset. On the other hand, equity tokens may only follow the price performance of shares of the underlying asset. As such, these equity tokens operate more closely to derivatives tokens than utility tokens. Nevertheless, equity tokens are advantageous for investors who would like to gain price exposure to an asset without the responsibilities of ownership.
Other Types of Tokens
Now that we understand both utility and equity tokens, let's explore various other categories of token types in the cryptocurrency industry. We have categorized the following by the fundamental nature and functional properties of the tokens.
Don't forget to check out our free blog to learn about the latest industry developments, trending tokens, and top crypto projects! For example, save our "What is Luna Token?" and "Exploring ApeCoin (APE)" articles to expand your knowledge further.
Non-Fungible Tokens
Cryptocurrencies and regular fiat currencies that everyone is familiar with are fungible assets. Fungible assets mean, in short, that one five-dollar bill, or one ounce of gold, in your pocket is worth the same value as the five-dollar bill, or one ounce of gold, in someone else's pocket across the world. Fungible assets are interchangeable, traditionally divisible into smaller units, and make for an ideal medium of exchange in transactions. Conversely, non-fungible assets are one of a kind. Further, NFTs are pieces of code that digitally represent a unique asset or collection of assets.
NFTs mean anyone can tokenize a real-world asset on the blockchain. As such, NFTs will prove a valuable tool in the supply chain, healthcare, energy, and real estate industries. Plus, NFTs represent intangible digital assets such as music, graphics, and artwork. Moreover, NFTs are becoming increasingly popular within the financial realm of tokenized stocks, bonds, and commodities.
Index Tokens
Another type of token is an index token. An index token is a single asset with a value influenced by an underlying set of other tokens. Further, index tokens generally comprise a small percentage of many projects to allow investors to simultaneously gain price exposure to multiple promising projects. For example, the price of the NFTI ("non-fungible token index") index token moves according to the value of several existing NFT and metaverse projects. Also, index tokens are a convenient way to gain exposure to different projects all at once.
Stablecoins
Stablecoins have their own place and utility in the crypto industry. Accordingly, stablecoins are cryptographic assets with a stable price-peg to another currency or commodity. More frequently than not, stablecoins have a price-peg to the US dollar. However, stablecoins can be pegged to EUR, GBP, and AUD, among other currencies.
Stablecoins hold valuable utility in maintaining a stable price throughout the volatility of market fluctuations. Accordingly, most stablecoins provide an important stable store of value for crypto investors capitalizing on trades. That said, for a stablecoin to be true to its value, it needs to be backed by another asset of the same value. Otherwise, it is worthless. Thus, be careful and do your own research when investing in stablecoin holdings. For a deep dive into how stablecoins work, save our "Stablecoins Explained" article for later!
Liquid-Staking Tokens
Another type of token one may come across in the crypto industry is a liquid-staking token. Liquid-staking tokens represent the staked funds of the holders' underlying assets. For example, if Alice stakes her ETH in the Compound staking protocol, she will receive cETH in return. Alice is then free to use and trade her cETH as she would her regular ETH while simultaneously earning rewards on the original ETH locked in the protocol. As a novel and industry-specific crypto feature, liquid-staking allows investors and traders to simultaneously earn multiple streams of income with the same asset.
Exploring Different Token Types - Summary
There are thousands of different cryptocurrency projects available with hundreds of different types of tokens. Cryptographic coins and tokens are categorizable into many ecosystems, functions, and underpinning technologies. Accordingly, a "utility token" is an asset that provides a useful service or function to its holder, native platform, or both. For example, utility tokens can be used for governance, network security, identity, and improving user experience.
There are many other types of tokens available. This includes equity tokens, NFTs, liquid-staking tokens, and index tokens, to name a few. Check out our "Why to Learn Web3 Development" article next to discover the benefits of keeping up with the latest innovations in blockchain. Alternatively, dive deep into the basics of Web3 development with our JavaScript Programming 101 course! With no prior coding experience needed, Moralis Academy educates students on how to be the best blockchain developer, regardless of age or expertise. Check out the leading Web3 development platform and education suite at Moralis Academy today!
