For many people, understanding blockchain technology is quite confusing. But in reality, it is pretty simple:
You can consider blockchain technology as a decentralized, distributed ledger that records the provenance of digital assets.
"Token" and "Coin" are the most common words you hear a lot in cryptocurrency. These words carry different functionality, but many people get confused while using these terms.
Today, in this article, we're going to clear the fog for you. Generally, a coin is the native token of a blockchain. BNB, ETH, ETL, MATIC, SOL, and ADA are coins that drive their respective smart chain transactions.
Let's understand different categories of tokens!
There are six types of token classes:
DeFi (Decentralized Finance) Token
NFT (Non-Fungible Token)
Normally, we use paper notes, metal coins, or e-money to make payments. They are known as fiat currency which is controlled by the government. It indicates that central banks manage the supply and value of the currency.
In 2008, Satoshi Nakamoto created Bitcoin, the world's first digital currency. "Coin" in the cryptocurrency world doesn't mean the physical coin; it represents a decentralized and digital coin that can be used as a mode of payment.
This kind of digital coin has the same functionality as fiat currency. Moreover, this digital currency has more security, stability, and durability than centralized currencies.
You can share, store, or trade these crypto coins just like you do with fiat currencies.
To understand what a utility token is, we must look at what token means? What are we waiting for? Let's get into it!
A token is an investment, utility, or unit of value that an enterprise issues. Tokens symbolize programmable assets or access rights managed via a smart contract and a distributed ledger.
Utility tokens are one of four classifications of cryptographic tokens that describe digital units of value on the blockchain.
A Utility token has a wider functionality than a coin. Utility tokens have value, but you cannot use them as money as you do with coins. They offer users access to a future product or service.
Utility tokens are often used in initial coin offerings (ICO). Investors get special access to products or services in exchange for enabling to fund blockchain-based projects.
During the ICO, a business firm sells utility tokens. Investors can purchase the tokens and use them as a payment method on the platform developed by the company.
Utility tokens can be bought either with cryptocurrency or fiat money. But in order to use any service or product other than the token, you need to swap it first into fiat or crypto.
Security tokens are computerized resources that get their worth from an external resource that can be exchanged.
These tokens are restricted to Federal laws that control security. The security tokens must follow Regulation D, Regulation A+, and Regulation S guidelines.
Security tokens are made as investments. Profits in the form of extra coins are given to token holders each time the responsible organization of the tokens acquires a benefit in the market. Clients who hold the security token will likewise earn ownership for the organization.
Pretty exciting, right?
Usually, when a company releases tokens, it's known as ICO; but in the matter of security tokens, when a company issues a security token, it's called STO (Security Token Offering).
STOs should be enrolled with the particular monetary market authority. The additional regulations add extra security to STOs and make them significantly strong against fraud.
Governance tokens are digital currencies that symbolize voting power on a blockchain project.
The introduction of a governance token allows the community to engage more transparently and effectively in the decision-making process.
Holders of governance tokens, also known as stakeholders, have the power to influence a variety of factors of a blockchain project, such as making decisions about the roadmap or the product/services, allowing or rejecting new features, or even altering the structure of the protocol.
Since there is no unified party deciding everything, these tokens help develop an honest government inside the framework.
Since decentralization is getting popular, DeFi tokens are taking the market by storm. Before we learn more about DeFi token, let's take it from the top and understand what DeFi is!
Decentralized Finance, also known as DeFi, is based on decentralized applications (DApps) that perform financial movements on the blockchain.
Why is it so prominent?
As the name mentions, it is a decentralized ledger where participants perform transactions without mediators like banks or exchanges.
DeFi tokens are a new revolution in the crypto market, which is at the core of the decentralized ecosystem.
The usability of DeFi tokens includes various sectors like investment, landing, plying voter rights, payments, and trading. Not only DeFi tokens perform a variety of functions, but they can also be traded or stored like other cryptocurrencies.
What more do you want? Well, let's not forget NFTs.
Non-Fungible Token (NFT)
You might have heard of the Nyan Cat that created a buzz about NFTs in the market.
NFT is a short form for Non-Fungible Token which means something unique and irreplaceable with anything else.
NFTs are one-of-a-kind digital assets that represent real-world entities like music, videos, art, or in-game items. NFTs are a tokenized - so-called digital- representation of these things.
Anyone can create and mint NFTs through smart contracts that give the ownership and manage the transfer of the NFT's.
NFTs are traded online, mostly with cryptocurrency, and they are, for the most part, encoded with similar coded programming like many other cryptos.
These digital works of art help artists and content creators by allowing them to showcase their talent and sell it online so that they don't have to rely on galleries or auction houses to sell their art. Moreover, it helps them earn more profit through royalty programming, where they make a percentage of the deal whenever their piece of art is sold to a new client.
Cryptocurrency has undoubtedly brought giant waves in every field of the ecosystem. The time is not far from where almost everything will be dealing with cryptocurrencies.
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