How to Tell the Difference Between Different Types of Tokens: a Step-by-Step Guide from a16zcrypto
From network tokens to meme coins, a16z crypto has provided a framework to help businesses navigate the growing cryptocurrency landscape.
What is a cryptocurrency?
According to Wikipedia, a cryptocurrency is a digital currency that operates through a computer network, without relying on a central authority like a government or bank to maintain it. When Bitcoin emerged in early 2009, it was the only cryptocurrency. However, things have changed significantly since then. There are now more than 12 million different tokens, according to data from cryptocurrency aggregator platforms.
With the rapid growth of the cryptocurrency market, it is extremely important to differentiate between the different types of tokens. To help clarify this, Miles Jennings, Scott Duke Kominers, and Eddy Lazzarin of a16zcrypto have created a framework that distinguishes the seven types of tokens that entrepreneurs most often encounter.
Network Tokens
Network tokens are used to keep a blockchain protocol or smart contract running. Their value comes from how the network operates and often have a clear purpose, such as helping network operations, forming consensus, or upgrading the protocol.
These tokens rely on trust and often include features like programmatic buybacks, dividends, or the creation and burning of tokens to adjust for inflationary pressures. Notable examples include Bitcoin, Ethereum, Solana, Uniswap, and Dogecoin.
Security Tokens
Security tokens are digital versions of traditional securities like company stocks or bonds. They give the holder specific rights, such as dividends or rights to settlement payments. These tokens are still subject to U.S. securities laws.
Examples include Etherfuse Stablebonds and Aspen Coin, which offers fractional ownership in the St. Regis Aspen resort.
Company-Backed Tokens
Company-backed tokens are tied to an off-chain application, product, or service operated by a centralized company. They are primarily used for off-chain operations, but may use blockchains and smart contracts to facilitate payments.
These tokens are subject to the control of a specific company, such as Binance Coin (BNB), which starts as a company-issued token and then transforms into a network token.
Arcade Tokens
Arcade tokens are primarily used in internal systems and are not intended for investment. They function as currency in virtual economies, such as loyalty points or in-game digital gold. Arcade tokens typically have an unlimited supply and limited transferability.
Examples: FLY, a loyalty token from the Blackbird and Pocketful of Quarters restaurant networks.
Collectible Tokens
Collectible tokens (NFTs) represent things like artwork, music, or event tickets. Popular NFTs like Bored Ape Yacht Club and CryptoPunks have become popular in the digital collectibles market. They do not rely on the efforts of a third party and are therefore not covered by US securities laws.
Asset-Backed Tokens
Asset-backed tokens derive their value from an underlying asset, which can be a commodity, fiat currency, or digital asset. These tokens are often used as a store of value or a hedge against risk. Examples include fiat-backed stablecoins like USD Coin (USDC).
Memecoins
Finally, memecoins are tokens that have no specific use case beyond community hype. They are largely speculative and their value fluctuates wildly. Notable examples include Pepe Coin and Dogecoin.
Understanding the different types of tokens helps investors and businesses navigate the cryptocurrency market more effectively, avoiding confusion between asset classes.
