Tokens are cryptocurrencies deployed on the blockchain and serve various purposes. Tokens (also called coins) are digital currencies that can be created and deployed by basically anyone. Tokens are classified broadly into different types based on their purpose and this article will explain these types.

Utility Token

Utility tokens are digital tokens that provide access to a product or service within a specific ecosystem or platform. They are designed to facilitate transactions and interactions within a decentralized network or application.

An example is Ethereum's native token called Ether (ETH) which is a utility token used to pay for transaction fees and computational services on the Ethereum blockchain. Similarly, Binance Coin (BNB) is used to pay for trading fees and other services on the Binance exchange. SOL is used for transaction fees on the Solana blockchain.

Governance Token

Governance tokens are digital tokens that grant holders the right to participate in the governance of a decentralized protocol or platform. Holders can vote on proposals, decisions, or changes to the protocol's parameters, such as fee structures, protocol upgrades, or changes to consensus mechanisms.

An example is MakerDAO's MKR token which allows holders to participate in the governance of the MakerDAO protocol, including voting on adjustments to stability fees and collateral types. JUP is also a governance token.

Security Token

Security tokens represent ownership or rights to an underlying asset, similar to traditional securities such as stocks, bonds, or real estate. They are subject to securities regulations and often represent ownership in a company, fractional ownership of real estate, or rights to revenue sharing.

Examples are tokenized stocks, real estate, or investment funds that offer ownership or dividends to token holders are examples of security tokens.

Meme Coin

Meme coins are cryptocurrencies that gain popularity primarily through viral memes, internet culture, or community-driven marketing efforts, rather than through technological innovation or utility (although some meme coins are evolving to provide utility, an example is BONK). They often serve as a form of entertainment or social commentary rather than as serious financial instruments.

An example is Dogecoin (DOGE), originally created as a joke based on the "Doge" internet meme. Despite its lack of utility, it has garnered a large and enthusiastic community.

Stablecoin

Stablecoins are cryptocurrencies designed to maintain a stable value relative to a fiat currency or another asset, such as gold or a basket of commodities. They provide stability and serve as a medium of exchange, a unit of account, and a store of value within the cryptocurrency ecosystem. They are usually pegged to and/or backed by other currencies (fiat, other cryptocurrencies, physical valuable assets).

Examples of stablecoins are Tether (USDT), USD Coin (USDC), and Dai (DAI) are examples of stablecoins, each pegged to the value of the US dollar through various mechanisms.

Non-Fungible Token (NFT)

Non-fungible tokens are unique digital assets that represent ownership or proof of authenticity of a specific item or piece of content. They are used to tokenize and trade digital art, collectibles, in-game items, and other unique assets, leveraging blockchain technology to verify ownership and provenance.

CryptoKitties, digital artwork sold as NFTs, and virtual real estate in blockchain-based virtual worlds like Decentraland are examples of non-fungible tokens.

Payment Token

Payment tokens are cryptocurrencies primarily designed for use as a medium of exchange in transactions. They facilitate peer-to-peer payments, remittances, and merchant transactions, aiming to become widely adopted as digital currencies.

Bitcoin (BTC) and Litecoin (LTC) are examples of payment tokens, designed for secure, borderless, and censorship-resistant transactions.

Each type of token serves different purposes within the cryptocurrency ecosystem, catering to diverse user needs, preferences, and use cases. Understanding the characteristics and functions of these tokens is essential for investors, developers, and users alike when navigating the complex landscape of cryptocurrencies and blockchain-based assets.