Token and cryptocurrency functions you need to know
There are different ways to classify tokens and cryptocurrencies, but it’s most useful to group them by the functions they perform. This will help you understand the value of each type, which is an essential factor when deciding which crypto asset to invest in.
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Payment and store-of-value tokens
First and foremost, cryptocurrencies were invented to substitute existing means of payment, such as fiat currency. That's why many of them are designed for buying goods and services. Among those are Bitcoin and Litecoin. Over time, the main cryptocurrency in the market has become a means of storing wealth due to its limited supply and growing social recognition. That's why Bitcoin is often referred to as “digital gold”.
Governance tokens
Some cryptocurrencies and tokens serve as a means of governance. They allow their holders or stakers to vote on important decisions related to the development of the crypto project or any other important agenda. Examples include UNI, APE, ENS, BLUR, and more.
Network utility tokens
Native tokens play a critical role in the operation of the blockchain. They facilitate network operation through staking and are used to pay transaction fees. These are ETH, SOL, and ALGO.
Exchange tokens
Exchange tokens – also known as tokens of decentralized platforms – are a separate category of assets. These types of cryptocurrencies often offer their holders discounts on platform fees and the opportunity to participate in IEO or IDO. Any platform or centralized exchange might come up with additional use cases. Tokens like WBT, BIT, and CAKE are just a few examples.
Stablecoins
The cryptocurrency market is known for its high volatility, which has prompted the need for a solution that could provide stability. That's where stablecoins come in. They are tokens that are pegged to fiat currencies, such as the US dollar (USDT) or other tangible assets like gold (PAXG), which help to maintain a steady price.
Summary
It’s worth noting that the same cryptocurrency or token may belong to multiple categories simultaneously and serve different functions. So, it’s important to keep this in mind. It is also crucial to distinguish between cryptocurrencies (coins) and tokens as they are separate concepts, albeit often being used interchangeably. If you want to delve deeper into this topic, be sure to check out our dedicated article on the subject.
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