Electronic trading has recently taken over as most stock trades are now done virtually. Words like bitcoins and cryptocurrency are being thrown around, but how many people understand what these currencies are?
The framework for the classification of tokens is based on five dimensions. Understanding these dimensions forms the basis for understanding the types of cryptographic tokens and how they are used. These dimensions are purpose, utility, technical layer, legal status, and the underlying value.
The Five Dimensions of Tokens
Tokens are implemented depending on the technical layer of the blockchain system on which it is based. Under this, we have several types of tokens including the blockchain-native tokens, non-native protocol tokens, and app tokens.
Blockchain native tokens include Bitcoin, Ether and Ethereum, and Steem. These tokens are critical to the operation of the blockchain as they form an integral component of it.
The non-native type of tokens is unlike the former because they are implemented in a crypto economic protocol rather than directly on the token. They are tracked on an underlying blockchain to which it is not integral, and an example of it is the Decentralized Oracle Protocol and the Augur.
App tokens are the other type based on the technical layer dimension of tokens, and an example is Wisdom, Gnosis, and SAFE Network.
Tokens can also be classified depending on their goal. Cryptocurrencies are tokens whose use is global, as they are intended to be used as “pure” cryptocurrencies. They also have the advantage of functioning as a store of value.
Another type of token under the purpose dimension is the network one. Network tokens are intended to be used within a specific system. This could be a software or an application. Examples are Gnosis, Stacks, and Blockstack.
Finally, investment tokens, just as their name suggests, are used to invest in entities or assets passively. They act as a promise of share value in an asset or a future success but have little to no significant functionality. Examples are Neufund and Digix Gold.
Even though most tokens have a monetary value attached to it, the source of this value varies. For example, asset-backed are tied to some asset in the real world, like a piece of land. Network value tokens have their value linked to the value and development of an application or network. An example of an asset-based token is GOLD and GoldMint while Ether and Ethereum are examples of network value tokens.
What is the usefulness of a particular token? How does the token provide utility to its users? The ways to provide utility can be by giving one access to a digital service or by allowing the user to actively contribute to a work system. Usage tokens give access while work tokens give one the right to participate in a system.
Hybrid tokens are another subdivision under utility, and they provide the user with both access and the right to contribute to a system.
The jurisdiction of a token in a country is dependent on the regulations on electronic trading. As such, tokens can be divided into utility, security, and cryptocurrencies. What can be defined as a cryptocurrency in one country may be a security token in another. Cryptocurrencies can be used as a store of value and medium of exchange while security and utility tokens may not necessarily have the same characteristics. As tokens are a relatively new medium of exchange, some countries may not have regulations regarding them.
The classification above should help one understand how cryptocurrencies are used and how they are valued.