Not all cryptocurrencies are the same. Understanding different token types helps you evaluate projects and make informed investment decisions.
Coins vs Tokens
Coins (Native Cryptocurrencies)
Characteristics:
- Own blockchain
- Primary currency of network
- Used for transactions/fees
- Examples: BTC, ETH, SOL
Tokens
Characteristics:
- Built on existing blockchain
- Use another network's infrastructure
- Various purposes
- Examples: USDT (on Ethereum), UNI
Major Token Categories
Payment Tokens
Purpose:
- Medium of exchange
- Store of value
- Transfer of value
Examples:
- Bitcoin (BTC)
- Litecoin (LTC)
- Bitcoin Cash (BCH)
- Monero (XMR)
Characteristics:
- Focus on payments
- Transaction speed/cost
- Network security
- Adoption for commerce
Utility Tokens
Purpose:
- Access to services
- Platform functionality
- Ecosystem participation
Examples:
- Chainlink (LINK) - Oracle services
- Filecoin (FIL) - Storage
- Basic Attention Token (BAT) - Advertising
Characteristics:
- Required to use platform
- Not primarily investment
- Functional purpose
- Value tied to usage
Governance Tokens
Purpose:
- Voting rights
- Protocol decisions
- Treasury management
- Community participation
Examples:
- Uniswap (UNI)
- Aave (AAVE)
- Compound (COMP)
- Maker (MKR)
Rights Typically Include:
- Vote on proposals
- Parameter changes
- Fee structures
- Development direction
Security Tokens
Purpose:
- Represent ownership
- Regulated securities
- Traditional assets on-chain
Examples:
- Tokenized stocks
- Real estate tokens
- Revenue share tokens
Characteristics:
- Subject to securities laws
- Represent real-world assets
- Regulated trading
- Investor protections
Stablecoins
Purpose:
- Price stability
- Trading pairs
- Value storage
- DeFi collateral
Types:
Fiat-Backed:
- USDT (Tether)
- USDC (Circle)
- Backed by reserves
Crypto-Backed:
- DAI (MakerDAO)
- Over-collateralized
- Decentralized
Algorithmic:
- Use algorithms for peg
- Higher risk
- UST collapse example
NFTs (Non-Fungible Tokens)
Purpose:
- Unique digital ownership
- Art and collectibles
- Membership/access
- Gaming items
Characteristics:
- Each token unique
- Proof of ownership
- Digital scarcity
- Metadata attached
Use Cases:
- Digital art
- Music
- Gaming assets
- Event tickets
- Domain names
Meme Tokens
Characteristics:
- Community-driven
- Often no utility
- High speculation
- Volatile
Examples:
- Dogecoin (DOGE)
- Shiba Inu (SHIB)
- Pepe (PEPE)
Caution:
- Extremely risky
- Often pump and dump
- Entertainment/speculation
Token Standards
Ethereum Standards
ERC-20:
- Fungible tokens
- Most common standard
- Interoperable
- USDT, UNI, LINK
ERC-721:
- Non-fungible tokens
- Unique items
- Digital collectibles
- NFT standard
ERC-1155:
- Multi-token standard
- Both fungible and non-fungible
- Gaming applications
- Efficient transfers
Other Blockchain Standards
BNB Chain (BEP-20): Similar to ERC-20
Solana (SPL): Solana Program Library tokens
Cardano (Native Tokens): Built into protocol
Evaluating Tokens
Utility Token Questions
Ask:
- What does the token do?
- Is it necessary for the platform?
- What drives demand?
- Token velocity concerns?
Governance Token Questions
Ask:
- What can you vote on?
- How is governance structured?
- Value accrual mechanism?
- Active community?
Investment Considerations
Evaluate:
- Token economics (supply, inflation)
- Distribution (who holds)
- Vesting schedules
- Use case necessity
- Regulatory status
Tokenomics
Supply Factors
Consider:
- Maximum supply
- Circulating supply
- Emission schedule
- Inflation rate
Demand Factors
Consider:
- Use case necessity
- Staking/locking
- Burning mechanisms
- Network growth
Distribution
Watch:
- Team allocation
- Investor allocation
- Community share
- Vesting periods
Value Accrual
Mechanisms:
- Fee sharing
- Buybacks
- Burns
- Staking rewards
Regulatory Considerations
Securities Classification
Howey Test:
- Investment of money
- In common enterprise
- Expectation of profit
- From efforts of others
If All Four: Likely a security
Implications
As Security:
- SEC jurisdiction (US)
- Registration required
- Trading restrictions
- Investor protections
As Utility:
- Less restrictive
- Still some oversight
- Clearer path
Token Red Flags
Warning Signs
Avoid If:
- No clear use case
- Heavy team/insider allocation
- Anonymous team
- Unrealistic promises
- No code audits
- Poor documentation
- Excessive marketing vs development
Key Takeaways
- Coins have own blockchain; tokens built on others
- Utility tokens provide platform access
- Governance tokens give voting rights
- Security tokens represent ownership
- Stablecoins maintain price stability
- NFTs are unique digital items
- Tokenomics crucial for evaluation
- Regulatory status matters
- Due diligence essential for all types
What's Next?
Learn about smart contracts and how they power decentralized applications.
This article is for educational purposes only and does not constitute financial advice.
Risk warning. This is education only, not financial, investment, tax or legal advice, and not a recommendation to buy or sell anything. Trading forex, CFDs, stocks, commodities, futures, options and crypto is high-risk; with leverage you can lose more than you deposit, and most retail traders lose money. Before you trade or invest in any form, check the local laws where you are and the rules of your country of residence, and consider your own financial situation; if in doubt, ask a licensed adviser. Past and tested results, and all examples, are for illustration only and do not guarantee future results.