A digital unit designed with utility in mind, providing access and use of a larger crypto economic system.
Tokens must not be mistaken for cryptocurrencies or
altcoins. Tokens and altcoins are subsets of cryptocurrencies. These are a type of cryptocurrencies that are used as a specific asset or represent a particular use on the
blockchain. They are sometimes created through
initial coin offerings (ICOs) — or other fundraising methods including
initial DEX offerings (
IDOs).
Tokens can have multiple purposes. The two most common types are security and
utility tokens.
Security tokens operate in a similar way to shares. This is because their value is determined by a tradable external asset. Utility tokens enable users access to products or services provided by a platform. One stark difference between security and utility tokens is the degree of regulation between both.
Utility tokens may not be subject to the same degree of regulations that security tokens can be. Failure of a firm to abide by rules can often lead to harsh penalties for a firm that has issued security tokens.
A blockchain startup can issue tokens to give its buyers certain privileges and access to certain products and services in the future. While not all ICOs have been successful, some optimists argue ICOs could replace traditional initial public offerings. Such a move could see cryptocurrency tokens swell further in popularity.