Tokens are digital assets, generally issued during an ICO. They typically grant holders the ability to purchase goods or use services of a company. During the ICO tokens are exchanged for cryptocurrency that in turn is used to fund the projects’ development.
Tokens are most often created based on existing blockchain platforms since the development of an in-house blockchain is usually a very lengthy, costly and unnecessary process. The most popular platform used by the majority of ICOs is Ethereum. Therefore all tokens issued based on the Ethereum blockchain are of ERC20 standard and Ethereum compatible. ( can be stored on the same wallets as Ethereum and etc.).
Utility tokens vs. Security tokens
Tokens are generally categorized into two categories, utility, and security.
Utility tokens are the most common type of tokens, and they are sold during the most ICOs. When an investor purchases a utility token, with it, he or she receives an obligation of the company to deliver its services to the investor. Utility tokens also grant the right to use the companies services and can be exchanged directly for goods or services of the company that issued the tokens. In this sense, utility tokens are not considered an investment since, unlike the company’s shares they do not grant voting rights or the right to participate in the distribution of profits.
On the contrary to the utility tokens, security tokens act similarly to the shares of a company, establishing the buyer as a full-fledged investor who receives part of the earnings in proportion to the investment and the right to vote on the project’s future. Security tokens are managed by the SEC, whereas utility tokens do not require regulation. For this reason, STOs or security token offerings are generally uncommon at this point in time.
Tokens behave similarly to a traditional currency in the scope of a single project, meaning that they can be exchanged for goods or services of the company. Tokens are essentially an exchange medium for value that is determined by the balance of supply and demand. They allow to self-govern the business model and distribute and share profits among token holders. In this fashion tokens allow projects to create enclosed economies on a micro scale.
Cryptocurrencies, altcoins, and tokens
Even though these words are often used interchangeably, they do not have the same meaning.
Cryptocurrencies can be defined as full-fledged currencies designed mainly to sustain financial transactions. Examples of popular cryptocurrencies are Bitcoin and Ethereum.
Altcoins are alternative cryptocurrencies, often created as a result of Bitcoin forks. Altcoins are generated to bring enhanced functionality compared to the original cryptocurrency and solve some or all of its technological problems. Examples of well-known altcoins are Bitcoin Gold, Bitcoin Cash, Dogecoin, Litecoin, and Namecoin.
Tokens are digital assets that are usually issued by a company based on an existing blockchain during an ICO. Tokens are purchased by investors and exchange for cryptocurrency that is later used as the capital for the development and marketing of the project. Tokens are then used to purchase goods or services offered by the company to power an enclosed economy.