Understanding Cryptocurrency Token Classifications

The world of Cryptocurrency has seen exponential growth over the past one and a half year. This growth can be attirbuted to the introduction and proliferation of more and more newer types of coins and tokens. Most of these coins or tokens started off as copycats of Bitcoin – some were successful but most failed. However, there are some which have a sound idea behind their existence and have a long-term use and benefit.

However, is cryptocurrency only a form of digital currency? Or is there something else in the manner in which they operate or present themselves to the world at large?

In this article we will explore the different types of token classifications. Please note, that there is a thin line of difference between these three classifications as many functionalities overlap each other. We have tried to bring about the primary features which are enumerate below.

Transaction Tokens

Transaction tokens are designed to be used as money in exchange for goods or services. They are equated as a medium of exchange like any other currency we use today and seek to become a replacement of fiat currencies that we use today.

These tokens are also called Coins in the cryptocurrency parlance.

Most transactional tokens have denominations to help make payments better and easier.
For example, the lowest common denominator for Bitcoin is Satoshi, but some payments are also made in mBTC (which is a 1000th of a Bitcoin)

All these tokens also aim to become a good store of value to give a higher purchasing power in long periods of time. They can also be traded on cryptocurrency exchange platforms and exchanged with other designated coins or in the purchase of the other tokens.

The value of a Transaction token comes from what it aims to buy and what the market perceives it to be in comparison to a fiat currency.

Some examples of Transaction Tokens are: Bitcon, Dash and Ripple

Utility Tokens

A utility token is one which has a utility or use on a particular platform; essentially, in this case a decentralized platform. Utility tokens are not created with the intention of a direct investment or for conducting transactions, but to provide access to a product, project, asset, or service.

It is exactly like using a key in an elevator to go to a particular floor in a building; here the key serves to be the utility token. In another example, it can also be equated to a token in a video arcade which allows you to play certain games. The utility of that token does not end when it is used for one game, but it can be used again for another game.

The Value of a utility token, hence, is derived from its usability, repeatability and what exactly the token provides access to.

Ether, which is the utility token for the Ethereum platform, was the first major utility token. It is used to pay for computations and access on the Ethereum network.

Other examples are – Lumens, which is used to pay for cross-border fund transfers on the Stellar network, and NEBL, which pays for the use of API software on the Neblio platform.

A utility token also holds a storage value, based on its long term use and need of the platform it supports. The prices is normally decided by an exchange or markets it is listed on.

Some utility tokens have also doubled as a transactional tokens, especially when purchasing a security token.

Security Tokens

A Security Token is akin to a share of a business, product, asset or project, which is purchased in a public sale. The primary need of such a token is to raise funds for the business, product, asset or project.

These tokens are given out as a part of a purchase deal with the company promoting it. One has to spend a Fiat currency to buy it, but in most cases, you spend a Transactional token or in some cases Utility tokens like Ether (ETH) to own a Security token.

All security tokens these days follow the ICO (Initial Coin Offering) path which is exactly like an Initial Public Offering for stocks or shares. The company offering the sale describes its project or business, in the form of a whitepaper, and promises a certain value in return – either in short term or long term. Only in this case the company keeps all its shares and gives out a nominal tradable token which may or may not hold a long term value.

This methodology thus allows the company to raise funds from all over the world.

The Initial price of a security token is normally decided by the company issuing it, but later, the markets takeover! A security token does sometimes hold a storage value, but it is based on the issuing company’s projected achievements and the success of the project it raised money for.

In Conclusion

The lines between these classification is a very thin one, as in recent times, there have instances of each functioning in a different domain. We might see more such classifications in the future but we still do not hope to see a clear cut demarcation between tokens.

The lines are blurring fast, as the evolution of cryptocurrencies happen.