Julian Ivaldy

Crypto-entrepreneur: Choosing the right type of token

For today's focus, we dive into tokenization. While crypto-currencies are starting to become known around the world, most people only think about the speculative interest of staking or investing. But with the emergence of blockchain technology, many tokens aim to deeply disrupt this new ecosystem to carry functionality for their project. In the race to adopt web3/blockchain projects, there are thousands of projects that seek to apply blockchain technology to different business segments, with more or less different tokenization, but that can be grouped by the type of token they have.

Each type of token offers unique functionalities according to the different types of usage. The idea of this edition is to zoom in on the different types of tokens.

1. The utility token

Utility tokens are often linked to tools using blockchain and support their functionality in a different way. They are required for customers to use or purchase the tool.

For example, in the early days of StaySAFU, owning the $SAFU token allowed users to use the various premium features offered by StaySAFU.

Utility tokens can be mandatory for a tool to work, to access certain functionality, but they can also be valuable to customers and be exchanged like any other token, even if they were not made directly to be invested.

The rule is simple: if the tool grows, more people will buy its token to use the features and its value will increase. It is often worth buying utility tokens during the ICO sale when the tokens are sold at a much lower price than the market price. 

The synergy between a platform and its utility token must be complete. The token provides the network necessary to strengthen the platform's economy and conversely the platform provides security to the token. It provides users with a payment mechanism for the product/service, which has most likely been developed on blockchain technology. 

2. The security token 

Decentralized finance has always been looking for more security. The exchange of assets without institutions is supposed to be able to guarantee certain transparency and security of users' transactions.

The security token was therefore born out of regulatory concerns and provides proof of a debt or certain financial rights. They function in exactly the same way as traditional securities and represent the legal ownership of a physical or digital asset. They can also represent ownership rights and their sole purpose is related to the ownership of an asset.

Most regulators determine whether a token is a security token by using a version of the Howey test - a test developed by the U.S. Supreme Court in a case brought by the Securities and Exchange Commission.

An example of a security token might be the Sia Funds token (Sia has two tokens, Sia coins which is a utility token, and Sia Funds which is its security token). Sia Funds tokens are used for revenue sharing on the Sia network; a 3.9% commission on each transaction related to storage on Sia is distributed to Siafunds holders.

3. The equity token

An equity token is a form of security token that represents the principal amount of an underlying asset, usually a company's stock. They act exactly like shares given to the buyer once the initial coin offering is complete.

By nature, they are accessible from outside the platform on which they are developed and their value can vary just like stocks. Those who own a stock token have some form of ownership in their investments. For example, you can refer to Slice or BFToken which are famous stock tokens.

4. The governance token 

As decentralized protocols continue to multiply and grow, many tools are willing to put their community at the center of their project. On the same principle as shares in a company, token holders have a vote in the development of the project. In this decentralized ecosystem, some projects want to offer more responsibility and power to their users.

Governance tokens are a good way for investors to build and shape the future of web3. This creates better decision-making processes and allows stakeholders to debate, collaborate and vote on how the system should be run. 

A well-known example of a governance token is Maker (MKR). This token allows its holders to vote on decisions about the decentralized finance protocol (DeFi) on which the decentralized stablecoin DAI runs.

5. The transactional token - or payment token

As many projects aim to increase the efficiency of their protocols, transactional tokens are used to enhance or speed up transactions. They primarily serve as units of account to be exchanged for services or goods. These tokens often offer additional functionalities such as the execution of a transaction without the traditional authorities or intermediaries (e.g. banks/payment portals...).

For example, with decentralized crypto-currencies, such as Bitcoin and Dai, it is possible for users to execute transactions without a traditional intermediary or central authority, such as a bank or payment gateway.

6. The non-fungible token

A non-fungible token is a digital representation of something unique. Each token represents a specific asset, so there is no standard value. This means that you can't directly exchange one non-fungible token for another.

Because data that lives on the blockchain cannot be duplicated or altered, non-fungible tokens are ideal for proving ownership, identity and authenticity. The NFTs in the Bored Ape Yacht Club collection are an example of this: each NFT is different and unique.


2022-03-29