The beginnings of cryptocurrency were humble and Bitcoin was the only one which introduced the peer-to-peer system. However, it wasn’t long before other types of coins were created, such as Ripple or Litecoin. The altcoins reached their peak with the introduction of Ethereum.
Ethereum was the main driving force behind ICOs (Initial Coin Offerings), thus changing the way we perceive coins. The term “token” popped up and it meant that the coins were not only a type of currency anymore. Tokens started flourishing all of a sudden and all of them had a wide range of functions.
Their functions were divided into five different groups which will be described below.
The Utility Token
Some tokens that you buy during ICOs have a different purpose. Utility tokens do not have the traits of the classic cryptocurrency but serve as the in-platform coins for purchases.
Simply, an ICO may present a product which will cost a certain amount of the tokens which they created. Once you buy those tokens during the ICO, you will have them available for purchasing their product or service.
So, why not buy the tokens after the ICO? Well, most of the ICOs offer their tokens for a significantly lower price, especially during the early period of token sale. If you are interested in their product or service, it would be much cheaper and convenient for you to buy them during ICO.
The Security Token
The security token is also popularly called equity token and tokenized security. The main purpose of this type of token is to act as a stock after the initial coin offering has ended.
It is just like old-fashioned buying of stocks to become a rightful owner of a certain percentage of a company. Furthermore, security tokens have become subjects to some of the biggest global regulators, thus being completely identical to stocks.
These tokens, however, have one big advantage compared to the traditional stocks – they are much easier to buy. Some ICOs offer a relatively small price for their tokens and you can invest really small amounts of money. If everything goes well – you are likely to have a huge return on investment.
Every new ICO creates their new token. It need not necessarily be a security token, but in certain cases it is.
What are The Differences between Utility Tokens and Security Tokens?
First of all, utility tokens are not subject to federal laws. Simply, by limiting their use just for the access to the platform they lose the status of the stock. They simply start to act as coupons on the web.
Secondly, the security token’s value may change according to the success of the platform. It is the similar principle with traditional stocks. In other words, the value is derived from some kind of tradable asset. On the other hand, the value of utility tokens mainly depends on the users and their activity within a platform.
Thirdly, you will be able to see real profit with security tokens. ICOs that utilize the security tokens mode usually make some kind of notification how their profits will be distributed. For example, an ICO can state that 10% of the platform’s profit will be distributed to the token owners quarterly. Of course, the percentage and time period may vary but you get the point. This type of profit is not available with utility tokens. Despite their current value, they will always serve only an in-platform coin.
The Currency Token
The currency tokens are actually the real cryptocurrencies. Their purpose is to use them to buy and sell things on the Internet. They are a decentralized online currency.
Just like every other currency online, you can store it in digital wallets and even trade them for other tokens.
The decentralized part of them is important since it is the main point why people prefer them to the digital fiat currencies. The decentralization means that peer-to-peer system is used to validate transactions and there is no one medium responsible for that (traditionally, that would be a bank).
The Reward Token
The reward token is also known as reputation token and its primary purpose is to reward someone on the platforms that use blockchain technology and tokens. Although the idea behind reward tokens is cute, they are still not popular among investors due to the fact that they do not have any real value.
The Asset Token
The asset token is a really interesting idea which is already in use but has not yet seen the popularity of other types of token. Namely, asset token represents the value of a real-world asset or product, thus making it easier to buy a share of that asset.
This process is called tokenization and the default example would be a tokenization of gold. Simply, instead of buying the gold itself, you can only just buy the tokens which represent that gold.
This is a splendid idea and tokenization can really come to life if carefully implemented. However, the whole tokenization part is still not fully researched and many investors still opt for other types of tokens.
Now that you know about the five basic differences, you can opt for one you like the best and start exploring ICOs that have that type of token. Bear in mind that the tokens are rapidly growing and expanding, thus broadening the specter of the ways they are used. In other words, there may be some other types of tokens in the very near future.