Tokens leverage crypto technology to serve various other user needs across industries. They often act as a medium for executing different decentralised apps and smart contracts, other than also acting as a store of value. NFTs, for example, provide the owner with unique rights to a piece of art or music.
CAKE, for example, is a native utility token of PancakeSwap. It is used for various purposes like yield farming, staking, participating in the PancakeSwap lottery, and voting on governance proposals through the platform’s governance portal. Let’s look at the different types of tokens.
The different types of tokens
Utility Token
These tokens have a specific purpose or task within the platform they were developed on. While they are not specifically created as an investment opportunity, one can use them for transactions only on the platforms they were designed on.
Companies typically release utility tokens to give their users a tool to pay for a product or service available on their platform. It is best to buy utility tokens during Initial Coin offerings.
Security Token
Security tokens are like traditional asset classes such as stocks and shares. Often called equity tokens, they represent an ownership stake in a company or project. Security tokens are given to a user when the initial coin offering for the company ends.
Security tokens may seem similar to utility tokens, but there is one significant difference; security tokens are limited by specific federal laws and rules of stock trading. In addition, security tokens can be accessed through different platforms and not just the one they were developed on.
Platform Token
These tokens use the blockchain infrastructure to make decentralised applications for various uses. For instance, Dai is a stablecoin pegged to the US dollar, and it maintains its pricing volatility through smart contracts.
Platform tokens have various uses, from gaming and serving as a platform for digital collectibles to global advertising.
Currency Token
A currency token can be used the same way as any other currency globally. This means one can use them to buy goods and services. One can trade these tokens for other cryptocurrencies and even traditional fiat currencies.
A classic example of a currency token is bitcoin. You can use a bitcoin to buy and sell goods with any online merchant that accepts bitcoin as a payment method.
Governance Token
Decentralised projects evolve and increase over time, and there is a need to refine the decision-making processes that affect these projects. Governance tokens do precisely this. They allow stakeholders of the decentralised project to collaborate and vote on how they want to manage the project. Governance tokens fuel blockchain-based voting systems. One example of a governance token is MKR in the maker protocol.
(Edited by : Yashi Gupta)
