Tokens based on the blockchain can take several distinct forms. If you want to carry out an ICO, the tokens you issue might serve many different purposes.
Broadly, the consensus is that there are three main types of token: currency, security, or utility (and in some cases, a hybrid).
These look and feel like money – hence the term “cryptocurrency”. Think bitcoin: worthwhile for a variety of different purposes but in the main firstly as a object with value that we can transfer for other objects with value, and secondly as a store of that value.
Bitcoin is the major cryptocurrency but there is bitcoin cash, litecoin, monero, ethereum and many more. The main drawback, or limitation, to cryptocurrencies (and other tokens) at the moment which affect their scalability is the cost of “mining” or transferring the coin from one wallet to another. Bitcoin itself has an inherent limit to the amount of transactions that can occur within a set timeframe.
These are tokens which represent an ownership or interest share in a product or company. Essentially, they are digital representations of an asset. Most
Security tokens lend themselves to the “easy money” that was raised in early 2017. They are primarily used as a method of raising money quickly for a project, and in return some form of value is promised to the token holder at some point in the future. In this way, there is a similarity to crowd-funding.
These tokens are generated for a specific use in a specific blockchain application. These will not generally have an application outside the platform for which they were generated. They can still be listed on an exchange and sold privately or amongst other holders and they do tend to trade on the basis of the general success of the cryptocurrency market as a whole.
This might seem like an oxymoron – blockchain is necessary as a platform for security tokens – but that still doesn’t explain what the secret is. You already know that when we send money via our bank, we send them instructions and trust them to carry out the process, for which we pay fees. Security tokens rely on blockchain for one singular purpose here which is to replace the bank’s involvement in the process.
The blockchain replaces the trusted intermediary because it is believed that the blockchain itself is an immutable record of all transfers involved, which cannot be altered. In order for a transfer to happen, decryption of the data belonging to the last transaction is required. Once decryption happens, the token is transferred to another wallet and the data resulting from the transfer is added to the chain. The data for each transaction can be seen by everyone. Thus, a chain of transactions is formed: the blockchain.