Digital currency is divided into coins and tokens. Some people identify these two concepts which is a misconception. Let’s understand how coins differ from tokens (this is important).
A coin is the monetary unit of a cryptocurrency project that operates on its blockchain. Coins are mined using mining. They can be easily transferred to other users of the system, paid for goods and services, and sold for fiat currencies. All coins except bitcoin are called altcoins. You need to understand this even to understand what are the best wallets for ADA.
A token is the monetary unit of a cryptocurrency project, which works based on an existing blockchain. Unfortunately, you can’t mine tokens: you can only buy them or receive them as a reward for some activity.
Types of cryptocurrencies
All existing digital assets are issued for one purpose or another. There are 7 main types of cryptocurrencies: payment cryptocurrencies, platform tokens, exchange tokens, stabelcoins, service tokens, securities tokens, cryptocurrencies.
The main purpose of payment cryptocurrencies as payment for goods and services. They are decentralized, easy to use, and have a high level of anonymity. Besides, such payment instruments can serve as an object for investments. The most vivid and illustrative example of a Currencies Coin is Bitcoin.
Cryptocurrency platforms tokens are used to develop and execute smart contracts (contracts that control the automatic transfer of assets between parties to a contract under certain conditions). Platforms Coins are also widely used as a means of payment. The most popular platform cryptocurrency is Ethereum.
All major trading platforms issue their digital tokens, which are a kind of “fuel” for their operation. By issuing internal tokens, the turnover of funds on the exchange is accelerated and liquidity is increased.
Exchange tokens are also used to buy other digital assets and discount trade fees.
The value of Stable Coins is tied to some physical asset (gold, fiat currency, etc.), so they are not as volatile as other digital currencies. Stablecoins, on the other hand, are backed by money, the issue of which is fully centralized.
The best-known coin of this type is Tether (USDT), equal to $1. Tether Limited, the company that issues the stable coin, claims that the value of USDT is 20% provided by the US dollars stored in its accounts. If you want to learn more about the difference between cex and dex exchanges, go to: https://alligat0r.com/blog/cex-vs-dex-what-is-the-difference/.
These are so called utility tokens that are used to hold ICOs (Initial Coin Offerings) and are issued in a limited volume. Generally, after completing the fundraising campaign, such tokens can be promoted as an investment instrument. An excellent example of a service token is Siacoin.
Security Tokens (STOs) are a direct analogy to securities. They are distributed to depositors, which allows for increased investment security. Furthermore, the ownership of such tokens is fixed in smart contracts. Thus, STOs are a kind of token that every investor receives. Such tokens are sold on trading floors, dividend payments to investors are distributed on their basis and they can be invested in other projects.
Crypto Commodities is the generic name for tradable or exchangeable assets obtained through a blockchain network. They are used to pay for goods and services within a specific platform. Such tokens are characterized by self-regulation and the automatic execution of financial transactions, which is embedded in the software code in the form of a smart contract.
Crypto Commodities are never used outside of a specific project. An example of a Crypto Commodity is Brave’s internal browser currency, which is used to pay for advertising and content creation.