Quick Guide to Token Types (With Examples)

in #tokens6 years ago

New visitors to the altcoin space are often confused by the different types of tokens that are in use. All altcoins share the fact that they are hash-encoded stores of value, but there are differences in how they interact with their blockchains and in their typical use cases. 

Understanding the differences between these token types will make it easier to recognize what to expect from the various coins and how to best use them.

Currency Tokens

Examples: Bitcoin, Bitcoin Cash, Bitcoin Gold, Litecoin, Dogecoin, DASH

Currency tokens are the oldest type of altcoins. Sometimes referred to as "digital gold", these are assets that have no value within themselves, but - due to their scarcity - can convey conferred value via the demand for them. These assets can be used to buy and sell goods and services and are typically decentralized or independent of a central bank, despite the fact that some central banks may hold such assets in reserve starting in 2018.

Currency tokens are typically democratized among their nodes - computers acting as transaction verifiers - in governance (DASH is an exception; it is managed by voluntary elections of nodes). They are also inelastic without full consensus among all nodes, with changes typically resulting in a hard fork and a new altcoin. New currency tokens are typically "mined" or rewarded to the node that did the most work on processing the transaction backlog via a "contest" to guess where on the blockchain the new block will lie.

ERC20 Tokens and ERC20 Clones

Examples: Ethereum, Ethereum Classic, Shift, NEO

"Ethereum Request for Comments" or ERC20 tokens and their clones are tokens that can be used for a blockchain where the transaction comment can hold "smart contract" data, such as Ethereum's. Smart contracts are autonomous programs that can conduct a transaction on an ERC20-compliant blockchain with one or more parties without the need of a mitigating third party. These transactions can be defined by the smart contract's creator and are not inherent to the token itself.

Thus, ERC20 tokens are "workhorse tokens" that can be used for any transaction-based interactions that are in compliance with the limits of the altcoin's protocol. Like currency tokens, these tokens are able to hold a conferred value, with many being scarce (although not as scarce as currency tokens). Also like currency tokens, these tokens are decentralized and democratically-controlled with hard forks being possible if a protocol change is backed by a weak consensus. 

Unlike currency tokens, ERC20 tokens are plastic. This plasticity allows ERC20 to be suitable backbones for ICOs, with many ERC20 tokens being ICO tokens. Due to the nature of their contracts, these ICO "sub-tokens" may not share the decentralization or democratic governance their mother token has.

Protocol or Utilitarian Tokens

Examples: Ripple, NEM, IOTA, Populous, Filecoin

These tokens are designed to work for a specific blockchain application. The token itself may be used to pay for transaction fees for using the application, usage tokens, transaction markers, or for any other purpose the application may dictate for it. The application may also destroy the token after it is used, as in the case of Ripple. Protocol tokens, like currency tokens, cannot be used for any purpose other than that for which it is created, although a protocol token can hold a conferred value.

Protocol tokens are not considered to be securities or investment vehicles within themselves, but could possibly be packaged to be an investment vehicle. 

Securities Tokens

Examples: tZERO, Bancor, Bytom, SALT

Securities tokens convey ownership or a share of ownership in a physical asset or a pool of physical assets. This could include companies, land, machinery, loans, or other securities. This makes these coins securities in their own right and subject to national and regional securities laws.

These securities are also subject to money transfer and capital gains rules. Involvement in these devices requires an extra level of precaution and due diligence due to the additional legal burden connected to them. These tokens may be value-conferring and may be tradeable in the coin markets.

Reward Tokens

Example: Steemit

These are value-conferring or potentially value-conferring altcoins that are given for user participation or for user loyalty. These may be standalone coins or coins connected to a brand and may be used to symbolize user's reputation, as a protocol token for the brand, or simply as a symbolic gesture of appreciation.

Even though these coins can convey conferred value, they are not popular as investment devices as of yet. Currently, the most popular investment vehicles are currency tokens, followed by ERC20 tokens and protocol tokens.

The Takeaway

Understanding the various token types can help you determine how to best use each one. While some are potential investment vehicles, others are useful only on the platforms for which they have been designed.  

Want to understand more about how to invest in altcoins and other New Finance options? Read Bitcoin Market Journal and learn to invest like a pro!

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Verry good post.. thanks for sharing .

Am confused

I am also confuse

First thanks for your important information.
I just review your post and I learn more about the bitcoin and also its tokens.
I like your post.
keep posting like this post.
Thanks and Regards,
Tarif

Nice post @bitcoin-journal ...there are alot of people who still don't know the difference between tokens.
I bet this helps.

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As always incredible posts from @bitcoin-journal.
This is just so useful and so well worked that I can only re-steemit for all my followers.

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