Crypto tokens have made their presence in the digital market. Businesses develop these digital assets on top of existing blockchains for facilitating transactions on a blockchain. They can also use these assets as investments. These fintech blockchain solutions vary with the crypto token types.
This article is a brief overview of these types, benefits, and more.
What is a Cryptocurrency Token and How Does it Work
A cryptocurrency token refers to a category of cryptocurrency representing a digital class asset or specific use. It exists on another cryptocurrency’s blockchain. Tokens are useful for investment, storing value, and making purchases.
A company issues these tokens as a unit of value or utility. Tokens present programmable assets or access rights. The organizations manage these tokens through underlying ledgers.
Since cryptographic tokens are a collection of rules, they are encoded in a smart contract, known as a token contract. Each token resides in a blockchain address. Any person with the private key pair belonging to the address can access the respective token.
A company issues tokens when they launch an Initial Coin Offering (ICO), similar to the Initial Public Offering (IPO). The major difference between ICO and IPO is that in an IPO the stockholder receives shares in return for the investment.
In an ICO, the user gets a token in exchange for the investment. Users can easily redeem these tokens to access the product or service of the organization.
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Crypto Token Types
The following is a list of crypto token types, including payment, utility, security, and non-fungible tokens:
Payment Tokens
Payment tokens are a medium of exchange and are mostly referred to as coins. The main objective of these tokens is to serve as a store of value and unit of account. For instance, coins like Bitcoin, Ethereum, Tether, etc. are payment tokens.
Payment tokens also gain or lose value on the basis of demand and supply in the market. An increase in demand and a decrease in supply leads to a rise in the value of the token. Similarly, the value decreases with lower demand, and greater supply.
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Utility Tokens
People can use utility tokens to access a blockchain-based product or service.
For instance, users can utilize transactional tokens like Ether to access applications on Ethereum. They can also use them to make payments for executing smart contracts on the Ethereum blockchain. Similarly, users can utilize GAS coins to access the NEO network.
Security Tokens
Security tokens refer to traditional securities like stocks and shares. These tokens are digital, liquid contracts for a proportion of any asset that already has some value, like a property.
A security token holder has ownership rights that are saved on the blockchain ledger. Several regulators control the issue and trading of such tokens.
In simpler terms, a security token is a one of its kind token representing a share in an external asset or organization. The token is issued on a permissioned or permissionless blockchain.
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Non-Fungible Tokens
A non-fungible token (NFT) is a unique digital asset or a crypto token. It represents ownership of a specific asset that may or may not exist in the real world. For instance, it can represent possession of any video, audio, art, etc.
These tokens are ideally used for proving possession rights, identity, and authenticity.
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Benefits of Cryptocurrency Tokens
Cryptocurrency tokens are one of the most important innovations in today’s world. They can facilitate frictionless markets in the fintech world.
Let us have a quick look at the benefits of cryptocurrency tokens:
- Tokens represent or create a specific asset on the blockchain. With the help of tokenized assets, people can easily trade any asset in the world without any arbitrator. It creates a frictionless market and removes a lot of barriers from the system.
- Tokens play a major role in making payments easier and more secure.
- Tokens hold value and can also be exchanged but most importantly they represent physical assets.
- From investment to storing value, and trading, tokens are beneficial in every sector and solve the problem of holding multiple assets.
Tokens are the future of payments and investments. It is a secure, reliable, and efficient way of trading.
Connect with our crypto development experts for more information about the types of crypto tokens and their business applications.