A token is a non-native blockchain asset with a value that isn’t limited to monetary purposes. Tokens also need the existence and operation of a different platform.
For example, ETH is a coin since it is a cryptocurrency native to the Ethereum network. Nevertheless, the capacity to generate new tokens inside the Ethereum network is one of the network’s most important characteristics. ¨Token¨ is the name given to the coins produced on this network. USDT, for example, is a token that can run on the Ethereum blockchain, as in other blockchains too, and is linked to the value of the US dollar.
A token isn’t designed to be used as money by definition. Yes, it has monetary worth, and you can generally trade it for bitcoin, ether, or other major cryptocurrencies, but its function is much more than that. A token might be money, but it can also be something more substantial. It can provide value to investors in addition to speculative profits and can be used for several purposes. Let’s take a look at each form of token one by one.
Non-fungible and fungible crypto tokens are the two types of crypto tokens, the latter being the most prevalent. Fungibility is a property of a token that indicates that two tokens are indistinguishable.
To put it another way, a dollar is a dollar, and Bitcoin is Bitcoin. You may trade the $10 bills with your friend and still have the same amount of money in your wallet. Fungibility refers to the fact that individual Bitcoins and dollars aren’t more valuable or uncommon than others. If they were, the entire ecology would be disrupted, and daily transactions would become highly inconvenient.
This functionality applies to most types of tokens and any fiat or crypto-asset with monetary functions for each unit of payment and distributes the value evenly among them. All fiat currencies, as well as all cryptocurrencies, are fungible. The only exception is when coins are marked from illicit use, in this case, they can be worth less or even be unspendable because exchange and payments providers reject them.
A payment token is a sort of cryptocurrency token that represents the purest form of digital currency. This sort of token has its own Blockchain and is frequently used as a payment method.
Payment tokens, in most cases, have no additional use or connection to other development initiatives. The goal of these cryptocurrencies, in general, is to act as intrinsically valuable media, analogous to cash or gold. They’re made to facilitate purchases, sales, and other financial activities, as well as perform many of the same tasks as traditional currencies like the US dollar or the Euro.
An example of a payment token is Bitpanda’s, BEST. The Bitpanda crypto exchange issues the Bitpanda Ecosystem Token. Holders of the token receive savings on trading costs, prizes, and other privileges.
The most well-known utility token is Ether, which drives the Ethereum network’s transactions and smart contracts. Although ETH may be used to make payments, its primary function is to be used in the blockchain.
Utility tokens serve a specific role in the network, which is to power activities. The more demand there is for the protocol, the greater the price of the token and the project as a whole will be.
Loyalty tokens, or social tokens, are an intriguing form of crypto utility asset that has lately acquired a lot of traction in the crypto community and introduced the notion of tokenization to a broader audience. Said, loyalty tokens are backed by a person’s, brand’s, sports team’s, or any community’s reputation. You may think of them as “fan tokens” that you can use to buy more material, products or to show your support for the community you like.
Other ICOs, in contrast to collecting money via utility tokens, have opted to make their fundraising efforts public and follow the rules. That is how security tokens came to be. Confident investors refer to them as equity tokens, and they are similar to traditional equities in some ways.
When you buy ordinary stocks, you’re betting on the company’s value rising and bringing you money. The main distinction is that you purchase a firm share, which you now control and may profit from through dividends. Furthermore, certain shares provide you with voting rights and the ability to receive bonuses from the firm.
Security tokens are technically similar to utility tokens, except they prove that you hold a portion of the new financial asset. On the blockchain, a security token is simply a digital stock certificate that documents your ownership. Although most security tokens do not provide investors with voting rights, specific platforms have developed a security token specifically for this purpose.
A governance token is a form of cryptocurrency that gives its owners control over the project’s protocol, product, and features. Holders can influence project choices by proposing or deciding on new features, altering token distribution schemes, and even redesigning the governance structure. Compound (COMP), Cardano (ADA), and Maker (MKR) are three of the most well-known governance tokens.
Debt tokens represent real estate mortgages, corporate bonds, and other conventional credit methods. This sort of token generally pays out dividends regularly. However, like the credit instruments on which it is based, the debt token is vulnerable to financial default.
The underlying token, cryptocurrency, fiat money, or other assets provide the value for derivative tokens. The USDT, a stable coin whose value is closely linked to the US dollar, is the most well-known example of a derivative token. Because it eliminates the extra step of transferring crypto to fiat, USDT is highly popular among crypto traders.
REAL ASSET-BACKED TOKEN
As the name implies, real asset-backed tokens reflect ownership of items like commodities, real estate, artworks, and so on. Smart contracts technology provides for transparent records of complicated algorithms and equal and fair ownership allocation among investors. It’s worth noting that the genuine asset-backed tokens are fungible, meaning they all reflect the same amount of ownership.
Non-fungible tokens (NFTs) have risen to prominence in recent years due to a slew of intriguing applications. To put it another way, NFTs are tokenized rare or unique assets.
The popular blockchain game Crypto Kitties helped to popularise such tokens. You may build and breed your digital cats in this game. If you wish to improve your pet, you may use ETH to pay for the extra features. Every kitty has its own set of “cattributes,” and the Ethereum blockchain safeguards the pet’s digital DNI, ensuring that no one can steal a kitty away from its owner.
Some cat breeds are extremely rare and might be considered an investment or a store of value. CryptoKitty #896775 (called Dragon), for example, was sold for as much as 600 ETH. The ERC-721 token standard enabled the creation, development, and trade of these non-fungible entities. It was the game’s foundation.
Gaming is the first NFT application that springs to mind as a result of CryptoKitties. At the moment, the use of non-fungible tokens is primarily restricted to this industry. Thanks to this invention, players may exchange different in-game items like armors and weapons, mascots, magical artifacts, cards, and more. Games like God’s Unchained, Decentraland, MLB Champions, and My Crypto Heroes are good examples.
Some may claim that they could own and manage gaming assets without using blockchains. Still, there is a crucial distinction to remember. Players never truly control their in-game assets until they use a blockchain. In reality, the game owners own all of the in-game wealth, not the players. “Your precious” settings, animations, and skins will be lost if the Fortnite creators decide to shut down the game or the servers undergo a severe breakdown. However, if your game assets are built on the blockchain, you will be able to maintain them even if something goes wrong.
NFTs can make it easier to manage and trade your valuables. Crypto-collectibles like cards and kittens have already been addressed, but you can also tokenize real-world objects like artwork. Their ownership rights will be validated and recorded on a blockchain.
The Austrian Postal Service’s Crypto Stamps initiative is one to keep an eye on. They reportedly printed 150,000 copies of the blockchain-based stamps, which can also be used as regular stamps.
FRACTIONAL OWNERSHIP OF ASSETS
Tokenization allows an ordinary individual to purchase a fraction of an asset that he would not otherwise be able to afford. A picture, a historical structure, a plot of land, securities, and collectibles may all be owned by a group of people in this situation. You can sell your share at any moment if the asset’s price rises. It would be a lot less complicated than selling a million-dollar picture or a whole home.
Identity management is another industry that might profit from the adoption of the NFT. Many bureaucratic procedures will be eliminated if you keep your ID and ownership data on a blockchain. It will also help safeguard your data because it will be difficult to erase or change information after being uploaded to a blockchain. As a result, assets are easier to move and manage from any location.
Different certifications and licenses can also be tokenized. You won’t have to gather and transfer paperwork to establish your identity, access privileges, or credentials in this situation. It has the potential to simplify procedures such as identification verification, voting, visa issuing, and so on.
The cryptocurrency world is vast, and, more importantly, it is continuously evolving. The many types of tokens described above each have a unique function, but it often happens that the same token has different functions, so there can be hybrid tokens that sum many types of them. Defining each kind is a crucial step towards gaining a better understanding of how companies are utilizing blockchain technology to assist consumers and businesses in order to benefit from digital assets.
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