It has been about 11 years since the crypto genesis occurred back in 2009,
when the legendary Satoshi Nakamoto mined the first Bitcoin block.
In the past decade, cryptocurrency has rapidly grown, winning an important spot in the financial market.
However, since it is still a fairly new concept, many people are not aware of the different types, their advantages and disadvantages.
Heck! Some people still think that Bitcoin is the only cryptocurrency out there.
Who can blame them?
At this time, there are a total of 5,888 coins on CoinGecko,
which means there are more out there than that even.
While most newbies and crypto investors think all cryptocurrencies serve the same purpose,
this is not the case.
If you're one of these, make sure to keep watching as I will be explaining what different types of crypto there are out there.
Let's get it.
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Alright, guys.
Let's be clear about one thing first.
Not all cryptocurrencies are meant to be alternatives to money.
While coins like BTC, USDT and DAI are meant to be this way,
other coins out there were meant to serve other purposes by providing different use cases.
This is important to keep in mind as most people think about all crypto is just another currency in every sense,
just because they have value.
But not all crypto is made equal.
And understanding the differences will help you when making financial decisions.
Okay, so now that that's clear, at least I hope so, I gotta confess something.
I've used the term cryptocurrency, coins, cryptocurrencies, cryptos, and tokens interchangeably for the sake of clarity.
This is something that has become normal in the crypto world but might not be correct technically in all cases.
So, let me explain this quickly.
Cryptocurrencies encompass all crypto you can trade on a crypto exchange.
There are independent cryptocurrencies which operate on their own networks,
like BTC and ETH,
which are actually coins.
A lot of people think Ethereum's a token. It’s a coin.
And then there are tokens, which are created over networks like Ethereum’s.
This distinction is not always necessary as it can be understood from context,
but if you are buying a token built on the Ethereum network,
also known as an ERC-20 token,
knowing that it is an Ethereum token will let you know that its value is tied to the network's performance.
Anyway, though, for the rest of this video, we're going to refer to all cryptocurrencies like tokens
as we will be talking about crypto categories based on function.
So, the 5 most prevalent token types are platform tokens, security tokens, transactional tokens, utility tokens, and governance tokens.
Each of these categories has its unique features based on usage.
Keep in mind that a token could also fit into more than one category simultaneously.
Therefore, these groups may not be mutually exclusive.
I'm here to just provide you with a general idea.
So, let's start with platform tokens.
These use blockchain infrastructures to deliver decentralized applications, or dApps, for various uses.
They benefit from the blockchains that they are created upon obtaining heightened security and the capacity to support transactional activity.
Platform tokens are the most used tokens when it comes to global advertising and marketplace industries,
as well as for gaming.
Those adorable virtual cats in CryptoKitties, guess what?
They’re platform tokens.
These provide a seamless experience simultaneously with built-in exchanges for utility tokens and associate experience for all blockchains,
presenting both stability and safety.
The use of blockchain ensures the safety of their users’ assets and prevents any outside attacks.
These tokens can be used as a separate currency within the platform and play an essential role in building the foundation for new kinds of systems.
The disadvantages of the token can be found within the dApp
for they are not always user-friendly and currently still have some limitations as a result of the scalability of blockchain.
Now, let's talk about security.
Security tokens are tokens that represent a stake in some external enterprise or asset.
They can act as direct on-chain representations of real world securities,
or as on-chain instruments serving a similar purpose for blockchain projects and/or digital assets.
Security tokens are usually chosen for their high transparency.
While the identities of participants are hidden for their safety, any other information can easily be accessed by anyone.
You can track and view the smart contracts that manage tokens or track issuance and hold for free.
Investors feel more secure using this token, hence its name,
for it emerged as a result of rising regulatory concerns,
an issue resolved by regulatory authorities using terms that didn't clash with existing legal definitions,
but a lot of thought was put into it.
Security tokens can represent property interests,
like real estate, equipment, payable invoices, and much more.
In this case, its value directly corresponds to its assets valuation.
Therefore, the more valuable the asset, the more valuable the token.
Most security tokens are only available for accredited investors and have limited liquidity in the secondary market.
These aspects may be a downfall and excludes you from investing in security tokens.
Third, we have transaction tokens,
which are mainly used to transact and are exchanged for goods and services.
It is the original cryptocurrency,
and its creation came as a way to create a digital decentralized currency with all benefits of the blockchain
for fast secure transactions with lower fees and no need for an intermediary for the global transfer of funds.
Now, this is the mainstream idea of what a cryptocurrency is and the reason you are probably watching this video right now.
These tokens allow its holder to pay for or sell goods and services in a fast and convenient way.
They are meant to operate as digital money.
Simple as that.
This is what Bitcoin, DAI, and USDT are.
Digital money with no central authority, physical limitations, and complete security and control over your money.
So, it's time to talk about utility tokens.
These were not created for direct investment or for conducting transactions,
but as the name suggests,
to have utility.
This utility is usually providing access to the services of the protocol where they exist.
Its value is based on the worth of what the token gives access to and the value of the platform token,
as the relationship is synergistic.
The platform token acts as a security for utility token,
while this one allows the existence of activity in the network so the platform token can gain value.
This is why utility tokens are closely associated with the supply-demand equation of markets.
Users can buy tokens to acquire the services it provides,
or similar to transaction tokens,
can buy them to hold on to and wait until its value increases.
The most popular example of utility tokens is most of the ERC-20 standard.
These are tokens created on the Ethereum network to provide access to the services of their respective projects,
with their value being tied to the platform token, in this case, Ether.
Utility tokens are the sidekick of the platform token, supporting them and doing all the actual work,
while the protagonist takes all the credit.
Basically, the Samwise Gamjee to Frodo.
It’s so embarrassing that I said that.
I can't carry it for you,
but I can carry you!
They're the forgettable face that no one thinks about as the hero.
Sure, I'm not saying the utility token is not popular, but at the end of the day, Ethereum will be the one at the top.
So, last but not least, we have the brains of every project,
governance tokens.
These tokens enable stakeholders to partake in the decision making process of the protocol,
often used by using voting to indicate support for proposed changes, or proposing changes and additions to it.
These tokens, unlike utility tokens, do not grant you access to any service but just give you a say on the direction of the project.
BitBoy, what's the point in obtaining governance tokens then?
Well, glad you asked.
Would you rather be one of the people steering the ship in a turbulent sea?
Or trust others to do it for you?
By providing holders with power over the protocol, these tokens incentivize liquidity providers.
This is the case of COMP, for example.
A governance token is given to Compound investors who provide liquidity as a reward.
While governance tokens may not present such a direct usage as the other tokens I mentioned,
it lends itself to a more fundamentals-based analysis.
By taking part in the decision making of the project and deciding its direction,
you’re having a direct impact on the future performance of the token that’s granting you that power.
Pretty neat, right?
Nah, maybe not.
I think it's cool.
But now it’s your turn.
Which of these types of tokens will you be keeping a closer eye on?
Which tokens do you know that don't belong to any of them?
Cool!
Let me know what you think in the comment section below.
I hope you enjoyed this video.
If you did, please make sure to smash the Like button and hit Subscribe to become a member of the BitSquad.
Thank you for watching.
Have a blessed day.
BitBoy out.
I don’t know why that sounded so weird.