Cryptocurrency vs Crypto Token

Base layer blockchains (called Layer 1 blockchains) have coins to be used for services into their ecosystem. The Ethereum blockchain has its own cryptocurrency (or coin) called ETH. These base layer blockchains provide a foundation on top of which applications can be built by anyone. These applications can issue their own token – so think of tokens as a unit of value for a business that exists on a blockchain. These coins and tokens are blockchain based digital assets with inherent value. These can either be traded for financial gains or used for different purposes within their ecosystems.

The difference between cryptocurrency and crypto tokens is that cryptocurrencies are native currencies being used on blockchain networks while a crypto token is created by an application or solution built on top of a blockchain. For example, ETH is a native cryptocurrency of Ethereum blockchain while UNI is a crypto token for Uniswap, which is a Decentralized Exchange built on top of Ethereum blockchain.

Hypermode’s definition of a crypto token is that it is a unit that represents a value or a specific purpose on a blockchain.

Gemini defines a crypto token as
“A unit of value that blockchain-based organizations or projects develop on top of existing blockchain networks.”

Types of Crypto Tokens

Crypto tokens can either be generated as fungible (divisible and non-unique; think Bitcoin) and non-fungible (unique and non-divisible; think art in the form of NFT) tokens. However, all these tokens fall into one of these categories :

1. Security Tokens

“A security token is an investment contract that is representing the legal ownership of a digital or physical asset which is verifiable on the blockchain.”

Security tokens can be considered as stocks. Such tokens represent a stake/ownership in a Web3 project. An example of such a business that issued its security tokens against preferred equity shares is tZero, a subsidiary of Overstock.com. It raised $134 million from over 1,000 investors who bought its tokens. These tokens give preferred dividend rights to the investors. Another example of a security token is the POLY token of Polymath. Polymath provides the technology to create, issue and manage security tokens on Ethereum blockchain.

2. Utility Tokens

These tokens represent a utility that holders/users of these tokens get. It gives access to the users to a product/service offered by a blockchain based business. It can be used for multiple purposes such as accessing a game on the blockchain, using an application of blockchain and much more. ETH, SOL and FIL are a few examples of utility tokens being used by people to access services on these platforms.

3. Governance Tokens

Blockchain technology has given rise to launch of new projects and businesses due to the decentralized nature of this technology. Decentralization means that there is no single entity that controls the decision making of a business. In fact, decisions are made collectively by the governance token holders of different blockchain based businesses. This resulted in introduction of governance tokens by many Web3 businesses. Governance tokens are defined as:

“A token that represents voting power on a blockchain project or business. A holder can exercise their voting rights in decision making process of the project through their holdings of governance tokens.”

The most well-known examples of governance tokens include OHM, UNI and MKR tokens which are used for governance purposes on their respective platforms.

4. Non-Fungible Tokens (NFTs)

Non-fungible Tokens have recently become mainstream due to massive adoption. These tokens can be used as one or more of the other three types, i.e., Security, Utility and Governance. The most well-known examples of NFTs include Crypto Punk, Bored Ape Yacht Club etc. Holders of these NFTs have access to club memberships and other benefits.