Bitcoin was the coin that introduced us to the world of cryptocurrencies. At the time, it was the only peer-to-peer transaction system for currencies. Eventually, others types of coins came into existence which were called altcoins, as they were created as an alternative to Bitcoin.
The innovation of cryptocurrencies did not stop there. With time, many new and different types of cryptocurrencies were invented to support different applications. The creation and growth of Ethereum gave birth to the term “token” which soon became a universal term for all currencies developed on the Ethereum blockchain. Depending on the application and functions of different tokens, they were further divided into different categories, as explained below.
Types of Tokens
Utility Tokens
These tokens are designed to be used for a particular purpose, usually within the application/platform for which they are developed. The most common use of a utility token is as a payment option for purchases within the platform. For instance, MEP tokens can be used for payment of healthcare services within the Medipedia platform.
Utility tokens are released by a company to provide their users with a mechanism to pay for a new company product or service, which has most probably been developed on the blockchain technology. It is usually beneficial to buy utility tokens during the ICO sale since the tokens during the ICO are offered at a significantly lower price than the market rate.
Security/Equity Tokens
Security tokens work in the same manner as traditional securities. Also called equity tokens, these act as a stock or share of the company, which is given to the buyer once the initial coin offering ends. By purchasing security tokens of a company/project, you get certain rights along with sharing in the company stocks.
Security tokens are different from utility tokens in that they are limited by specific federal laws and rules of stock trading. Equity tokens, by nature, can also be accessed outside of the platform on which they are developed. The value of security tokens may rise or fall according to the project’s performance, similar to stocks, which is not the case with utility tokens.
Reward Tokens
These are special tokens that are designed to act as a reputation token for a specific blockchain application. These are given in rewards, usually for free, to someone as appreciation. A perfect example is Medipedia Point Rewards (MPR) which are given to the services providers on the platform based on their performance reviews. A reward token doesn’t necessarily have a real value same as a standard token.
Asset Tokens
Tokens that are backed by a real asset, such as gold, real estate or bonds, are called asset tokens. These tokens represent the value of real assets and can be used for buying/selling the assets that they back. This improves the trading of physical assets on digital platforms.
Currency Tokens
A currency token acts the same way as a real currency and is used for the same purpose, for payment of purchases. A classic example is Bitcoin, which is a type of digital currency that can be used for buying and selling things with online/offline merchants who accept these coins. Currency tokens can also be traded for other cryptocurrencies and fiat currencies and can be sent to other users through a digital wallet.
Now that you know the different types of cryptocurrencies and their differences, you can make a better decision for buying new tokens in your next ICO investment.
