A cryptographic token is a digital unit of value that lives on the blockchain. There are four main types:
- Payment tokens
- Utility tokens
- Security tokens
- Non-fungible tokens
Payment tokens are coins. Their main purpose is to serve as a medium of exchange, store of value, and unit of account. Major cryptocurrencies like Bitcoin and Litecoin are payment tokens.
Like fiat currencies, payment tokens gain or lose value based on the laws of supply and demand. Greater demand and lower supply increase value, while lower demand and greater supply decrease value.
The twist is that some cryptocurrencies have a finite supply. Only 21 million Bitcoin can ever be mined, for instance. This means that, as more people start paying for goods and services with cryptocurrencies and the supply of new coins dwindles, their value should rise sharply, at least in theory.
These are tokens that give the holder access to a blockchain-based product or service.
Similarly, Gas coins give you access to the NEO network.
Security tokens are traditional assets like stocks and shares that have been converted into a digital token on the blockchain.
Like traditional securities, security tokens give the holder ownership rights. For this reason, a growing number of regulators are controlling how they’re to be issued and traded.
Most regulators determine whether a token is a security token using some version of the Howey test — a test developed by the US Supreme Court in a case brought by the Securities and Exchange Commission.
According to this test, a token is a security token if it meets three criteria:
- The holder has received the token in exchange for money that has been invested in a common enterprise
- They expect to make a profit
- They won’t do any of the work required to generate that profit.
A non-fungible token is a digital representation of something unique.
Each token represents a specific asset, so there’s no standard value. This means you can’t exchange one non-fungible token for the other directly.
That said, because data that lives on the blockchain can’t be duplicated or altered, non-fungible tokens are ideal for proving ownership rights, identity, and authenticity.
- Rock band Kings of Leon recently announced they’ll be releasing their new album as a non-fungible token. They’ll issue an Initial Token Offering that’ll last for two weeks, after which no more tokens will ever be issued. Each token will cost $50 and will entitle the holder to a vinyl and digital download. There will also be “golden tokens” that’ll grant the holders front-row seats to all the band’s concerts for life.
- While Ether was primarily designed to be a utility token, it’s also a payment token. A growing number of merchants and service providers accept payment in Ether. Unlike Bitcoin, Ether doesn’t have a lifetime supply limit. But it does have an annual cap — only 18 million coins can be mined in a single year.
- Bitcoin is very close to hitting its lifetime cap. As of February 2021, around 18.5 million Bitcoin have been mined, which means there are only 2.5 million Bitcoin left. Nobody is sure what will happen when the limit is reached. In theory, the supply of Bitcoin will have been exhausted. But some members of the Bitcoin community believe the protocol should be changed to allow for a larger supply.
Want to know more?
Matt Luongo was the first person to float the idea of raising Bitcoin’s supply cap. This Twitter thread explains his reasoning and shows just how controversial that proposal turned out to be.
What determines the value of a cryptocurrency? This Cointelegraph article explains the main drivers in clear, straightforward language.
The Metaco view
“Digital tokens have huge implications for the democratization of finance. Not only is the blockchain more transparent and efficient, but fractionalizing ownership broadens access to financial instruments to a wider swathe of customers, which in turn boosts their liquidity.”