Crypto Tokens: Different Types and What They Are Used For

Cryptocurrencies come in different forms, one of which is as tokens. This is just one class of cryptocurrencies, yet there are many types of tokens. You may have heard of or even used tokens without knowing that they are of a certain name.

Tokens are generally cryptocurrencies that are designed to be used for specific purposes. They also don’t have their own blockchains, so they share blockchains with other tokens. Bitcoin for example is a coin and has its own blockchain, same as Litecoin and Bitcoin Cash.

Tokens on the other hand are simply classified based on the token standards used to create them. For example there are ERC-20 tokens which run on Ethereum, and there are BEP-20 tokens which run on BNB Smart Chain (BSC).

In this guide, we name the different types of crypto tokens and describe what each one is used for to help you familiarize yourself with them.

Utility Tokens

These are tokens used to power a blockchain network. They are used mainly to pay for fees such as gas fees and others when you access the services on a blockchain. 

While they are primarily used to access services on a particular blockchain, they may also be used as investment assets.

An example is ether (ETH) which is used to power the Ethereum blockchain as well as being used as an investment asset. It happens to be the second largest crypto asset by market cap after Bitcoin.

Another example is Binance Coin (BNB) which is used to pay for all fees on BSC, and is also one of the top ten crypto assets by market cap.

Platform Tokens 

Platform tokens are used to power a decentralized application (dApp) such as a decentralized exchange on a blockchain. 

For example, Pancakeswap is a dApp on BSC that is powered by CAKE, the native token of the decentralized exchange. 

You’ll need CAKE tokens for fees if you wish to use Pancakeswap for anything such as staking or yield farming, hence it is the platform token for Pancakeswap.

Transactional Tokens

These are tokens created with the primary aim of being used for making monetary transfers, sometimes across borders. Such tokens are usually large in supply, sometimes with infinite supply.

Since they are to be used to facilitate payments, they also need to have low transaction fees and high speed of transactions.

Examples are XRP which is used by Ripple to facilitate cross-border payment settlement for financial institutions all over the world at a fraction of the cost.

Security Tokens

These are tokens that give the holders ownership of conventional financial securities such as stocks, bonds and the rest of them. 

Companies issue such securities in exchange for funds they raise to grow their businesses, and investors can hold onto them as evidence of having shares in the company instead of buying actual shares.

Security tokens are issued on exchanges that support the trading of such securities. Interestingly, many mainstream companies are exploring the use of security tokens instead of other traditional means of fundraising which are significantly more complex and probably more expensive.

Examples of security tokens are Polymath, tZero, Harbor, and Securitize.

Governance Tokens

Now last but by no means the list are governance tokens. These are tokens issued to users of a project to give them rights to vote on future developments for the project. 

Holders of the tokens are given the right to vote whenever decisions are to be made on the future of the project. The more governance token a user holds, the more votes they get, and the more influence they have over the project.

Examples of governance tokens are 0x (ZRX), Aave (AAVE), Aragon (ANT), and Balancer (BAL). governance tokens are mostly managed through a decentralized autonomous organization (DAO).

This is an organization run through smart contracts with an agreed upon set of rules and only votes from members of the community can change the rules. Of course, there are no central controls in such arrangements. 

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