Crypto Tokens: Utility, Governance and Security Tokens Explained
|— In crypto, fungible tokens are units of value that are part of a set – each one is interchangeable with any other item from that set, and all have the exact same value. DeFi tokens are one good example.
— There are multiple different types of fungible token in the crypto space, with different functions, uses and underlying value.
— Fungible tokens fall into three broad categories, namely utility, governance and security, all of which have specific utility which defines their value for you, the user.
Crypto is famous for its pace of innovation, with new projects, blockchains, and ecosystems springing up constantly. Your contact point with all of those things? Your crypto assets.
The tokens in your wallet are what enable you to interact with all the different options blockchain has to offer, but in such a diverse, fast-moving space, it can be hard to keep track of what different tokens actually mean for you.
Let’s change that, shall we? In this article, we’ll explain different fungible token categories, how they’re used and how each one might serve your crypto gameplan. Ready to be a token expert?
Before even touching on tokens, let’s start by examining what they are, and what they’re not, with a look at the difference between a coin and a token.
Tokens Are Not Coins
When it sits directly on top of its own native blockchain, instead of enlisting another blockchain as its base, a cryptocurrency is called a coin.
Bitcoin and Ether are both good examples of coins. Bitcoin sits directly on the Bitcoin Blockchain, and Ether sits on top of the Ethereum blockchain – in both cases, those blockchains are autonomous and can fully settle transactions on their own, without the help of any other network. This is what makes them coins (although confusingly, coins are sometimes referred to as payment tokens).
What Is A Crypto Token?
In 2015, Ethereum added something new to the equation – smart contracts. In short, this innovation allowed users to deploy assets atop the existing Ethereum network. And these assets are called tokens.
Tokens were introduced with the ERC-20 standard and it revolutionized the crypto space. Instead of having to set up an entire blockchain to launch a cryptocurrency, developers could create ecosystems on top of the Ethereum blockchain.
The ERC-20 standard was the first fungible token standard, but today, there are plenty of other token standards across multiple chains which offer this function. Furthermore, it was this standard that introduced the idea on Non-fungible tokens too. But that’s a story for another day.
With this definition firmly in mind, let’s get into the nitty gritty of what different tokens exist.
Types of Fungible Crypto Tokens
Broadly speaking, all tokens can be divided into three categories: utility, security and governance, and although tokens frequently fit into more than one of those categories, its important to understand the definition of all three, so you can always know exactly what you’re buying.
The vast majority of crypto tokens can be defined as utility tokens. In basic terms, a utility token is about access: it gives the user access to a specific platform or ecosystem We’ll give some great examples below. What’s important to note it that these tokens do not carry any kind of intrinsic value outside their use case, other than being traded.
So what kind of context are utility tokens used in?
DeFi Protocol Tokens – Rewards and Access
Decentralized finance is a major subset within the cryptocurrency space, and the protocols within that ecosystem are a prime example of utility token use cases.
Each protocol is its own ecosystem fueled by its own native token, and in order to access certain partf of that ecosystem, you need to own some of the native token. For example, if you decide to use the Aave protocol, you’ll need to have some AAVE tokens – these power the protocol, and aside from trading, have no inherent value outwith that platform. A perfect example of a utility token within the DeFi space.
Metaverse Tokens – Powering a Closed Digital Economy
The metaverse is one of the hottest sectors not just in crypto but in the entire tech industry, bridging the gap between real life and the virtual space via a digital economy. And for each platform (yes, there are many metaverses!), that internal economy is powered by its native token.
The tokens fueling these economies are called metaverse tokens, and these are another example of utility tokens in action.
The Sandbox’s SAND and Decentraland’s MANA currencies are both great examples of metaverse utility tokens: in each case, these native tokens drive the internal economy of the project, enabling users to pay for goods, buy items and wearables, purchase land tokens, trade, interact and buy services, and also giving them a share in the overall success of the project.
Platform Tokens – Currency for Services
Platform tokens are a special kind of tokens that are used as the fuel for a given digital service – sort of like buying tokens at the carnival.
The Basic Attention Token (BAT), the fuel powering the Brave Browser, is one great example. Brave Browser integrates BAT tokens to reward users for viewing ads, and incentivize creators to create original content – it is the juice that keeps Brave ticking, and you’ll need them to interact with the platform and what it offers.
So to summarize, utility tokens power an ecosystem or platform, and by having their own currency, platforms can interact with their users, incentivize them and build their own economy.
But tokens are about more than just economic incentives; increasingly, they are being used to confer power on their holders, and that has its own, intrinsic value.
Governance tokens have surged recently as a way for platforms, protocols and metaverses to engage with their users. And as Web3 causes norms to shift in terms of expectations from our favorite projects, it’s hardly surprising.
What’s Unique About Governance Tokens?
As well as having real value within their ecosystem (they are generally also utility tokens), governance tokens confer voting rights on their holders in terms of how their platform is run. This is done through the smart contract within the token itself, which interacts with the protocol to register the holder’s vote where it’s relevant; changes can then be implemented immediately and democratically on the blockchain, giving holders a real stake in the project, its values and future.
A great example of how these tokens are used can be seen in 2021’s Yearn.Finance token drop – the DeFi protocol decentralized ownership and control by distributing governance tokens among its most loyal users. This not only conferred power and control, but also generated a huge amount of interest in the platform, which in turn helped the value of the tokens.
Metaverses are another place where these tokens come to the fore: by giving platform utility tokens governance functionality, metaverses can galvanize their community, and enable members to vote on how their space is run, just like in a real life.
So although governance tokens are generally also utility tokens, with real value within their platform, what sets them apart is that they give power and ownership to their holders, something that is now an expectation across much of the Web3 space.
Security tokens tend to get a lot less press than other types of crypto, so let’s fix that right now. Unlike utility tokens, security tokens do not form an internal economy for an ecosystem and don’t grant any tangible benefit to the holder – their purpose is something else.
The defining feature of security tokens is that they are tied to a real-world company or endeavor, with each token giving its holder an ownership share in that company. Aside from this, it has no other utility – it is a purely speculative crypto asset.
Why Use a Security Token?
Security tokens function as an investment vehicle. Both companies and users have their own reasons for using them: for companies, it makes sense to use security tokens because they can quickly raise capital and distribute ownership in a regulated environment. For users, security tokens offer opportunities to invest in early-stage companies with the expectation of those companies growing and paying dividends in future.
Remember the ICO boom of 2017? Many of the tokens issued at that time were good examples of security tokens. This is because the buyers of the tokens ultimately hoped to profit through the work of the underlying company, and the company aimed to use the tokens as a means of raising capital for their project.
You can think of security tokens sort of like shares in a company – only the asset is tokenized and owned via the blockchain and may be regulated differently (that’s another matter!).
Securing Your Crypto Tokens Will Define Your Experience
So there you have it – a full lowdown on the key token categories of the crypto space. No matter what type of token you’re dealing with, they all have one thing in common: they need to be properly secured. That’s where Ledger comes in.
Owning your tokens means owning their address on the blockchain – that means controlling the private key. And as you know, the main threats to that private key are deployed via your connected device, so whether you’re using a hot wallet or an exchange wallet, this is absolutely not a failsafe storage option for your crypto assets.
We’ve said it before and we’ll say it again – an offline key is the only key! Ledger’s hardware wallets are designed to keep your precious keys secure, accessible to you, and completely insulated from online threats at all times. In other words, they are the only way to have absolute peace of mind as you engage with Web3.
Crypto Tokens – Your Ticket to the Blockchain Ecosystem
Be it accessing an economy, taking a hand in a platform’s future or buying a piece of a rising real-world project, each token type not only has a unique capability, but tells us something more broadly about where the crypto space is going, and what users expect.
Moving forward in this digital revolution, these tokens will continue to take on new forms and introduce innovative use-cases. If you want to understand the workings of a broader crypto ecosystem, you need to be able to spot the difference between different types of tokens. And when you can do that, you will be able to properly assess the mission and future of any project. Enjoy your freedom!
Knowledge is Power.
No matter what type of coins and tokens you own – they all need to be protected in the same way. Here, we talk about threats to your crypto assets, and how to give them a body swerve. Thanks School of Block!