Crypto Academy Week 10 - Homework Post for @pelon53 | Tokens
Good day steemians! I trust you’re all doing well. This is my submission to @pelon53’s lecture on tokens. Today, we’ll look at security token, utility token and equity token. While considering the aforementioned types of token, we’ll see how they can be used with the aid of blockchain technology.
In my previous article, I wrote on Non-fungible token (NFT) – another interesting type of token. I would recommend you read that later as well.
What is a token?
What comes to your mind when you hear of token? Tokens are anything that has a tangible representation. In cryptocurrency, a token represents a digital asset that can be used for transactions, blockchain voting, etc. Well, if you’d like to read more on token @pelon53 already explained the concept thoroughly here.
In the cryptoverse, Ethereum is known to be the blockchain developers head to when they want to create their own tokens. While cryptocurrencies run on blockchains own by them, tokens run on blockchains that are owned by others. These tokens are created by means of smart contracts.
For example, Steem and Steem dollar are on the STEEM blockchain, hence, they are cryptos and not token. Whereas, if they were others on the blockchain that are not owned by Steemit Inc, they’ll be referred to as tokens.
Smart Media Tokens
If you’ve been on Steem long enough, you probably would have heard of Smart Media Tokens. Then, Steemit Inc wanted to make it possible for others to create their own tokens on the STEEM blockchain.
Okay, that’s that. Let’s now consider what is meant by security token, utility token and equity token. For the purpose of this article we’ll focus on the tokens built on blockchain.
| Security token | Utility token | Equity token |
|---|---|---|
| Investment backed by a tradable asset | Not an investment | Unregistered securities |
| Token value is directly proportional to company’s valuation | No relationship between company and token | Similar to a company’s stocks |
Security Tokens
A security token that is built on a blockchain network is quite different from the traditional security tokens. With regards to blockchain technology, a token is called a security token if it is linked with a security offering.
When an investor buys a security token, it is similar to getting a share in a company. Hence, one’s share tends to increase when there is a massive growth in the company.
When the security token is built on a blockchain network, an investor enjoys the effectiveness and high performance of the network, while also being regulated by the government. Hence, it is fraud proof.
For example, the Securities and Exchange Commission (SEC) of the United States ensures that investors are protected. The SEC uses the Howey Test to see if the token is to be classified as a security token.
Examples of security tokens built with blockchain technology are Securitize and Polymath.
| Security Token | Token Issuance Standard |
|---|---|
| Securitize | DS-Token |
| Polymath | ST-20 |
While the above security tokens utilise their own token issuance standard, majority of other security tokens use the ERC-1400 protocol.
Utility Tokens
Utility tokens are tokens made for a specific purpose that give buyers a form of guarantee by providing a use case. Utility tokens usually offer value that interests its users. A good number of utility tokens are used for ICOs.
Utility tokens help startups and companies finance their developments and projects by offering the token. It’s one way crypto projects raise capital. Hence, a utility token is not mineable.
While buying a security token is like having a share in a company, utility token doesn’t offer a stake in that sense. When the blockchain company use utility tokens to raise capital by means of ICO, early access to their products is often offered.
Also, since the supply of utility tokens are usually capped, there’s always a tendency for the price of the token to increase when there’s an increase in demand. Hence, despite the tokens are not primarily for investments, you should not rule them out when making investment decisions.
Popular examples of utility tokens are Basic Attention Token (BAT), Golem Network Token (GNT), Sirin Labs Token (SRN) and Timicoin Token (TMC).
| Utility Token | Unique Feature |
|---|---|
| Basic Attention Token (BAT) | Users earn token for viewing Ads on Brave Browser |
| Golem Network Token (GNT) | Users provide CPU power for rendering and other tasks in Peer-to-Peer network |
| Sirin Labs Token (SRN) | Used for initial company funding and provide products for users |
| Timicoin Token (TMC) | Used to obtain medical information in Peer-to-Peer network |
Equity Tokens
With the aid of equity tokens, startups can offer their stocks by means of tokens. The smart contracts are usually built on the ethereum blockchain and holders can receive dividends. This type of token have some similarities with security tokens, as it is a form of investment in the company.
One advantage of equity token is that holders of the token can participate in blockchain voting. In that sense, the community of token holders can contribute in making decisions for the network.
On the other hand, equity tokens are usually not regulated. Hence, security tokens are safer investments.
A popular example of equity token is Uniswap (UNI). Late last year, Uniswap released their governance token to people that had been using the protocol over the years. This made it possible for users to contribute to the platform’s future while increasing their profitability.
Other examples of equity tokens are Decentralised Autonomous Organisations (DOA) tokens e.g. MakerDOA (MKR), Curve DOA Token (CRV), Badger DOA (BADGER), DAO Maker (DOA), etc.
Conclusion
With the growth of cryptocurrency over the last months, many people would consider to get more digital assets for themselves. Security tokens, utility tokens and equity tokens will definitely be a part of that decision. Depending on one’s risk appetite and goal, any of the options could be really profitable.
I want to thank @pelon53 for the lecture, I think this week’s task will help people to understand how to truly diversify their portfolio with different token types while maximising their profit potential.
Hola @eloghosa
Gracias por participar en la Academia Cripto de Steemit.