The world of crypto can sometimes come off as mysterious or confusing, but once you dive deeper, you come to realize that things are not as complicated as they seem.
In this article, we’re going to breakdown some of the commonly used crypto terms to help you better understand exactly what the difference is between coins, utility tokens, and security tokens.
Coins: think of them as money
Typically we use money in the form of coins, paper money, or electronic money for all the transactions in our day-to-day lives. This traditional money is known formally as a fiat current, any currency which is issued by the government and supplied by a central bank.
This concept was challenged when an individual named Satoshi Nakamoto created Bitcoin in 2008.
As the first-ever digital currency, Bitcoin’s ultimate goal was to function as a means of payment just like money. All a digital coin is a transferable accounting unit that stores value.
Taking that into consideration, there is not very much difference between a crypto coin and a physical one, other than the fact that a crypto coin is both digital and decentralized.
Utility tokens: coins that let you access a product or service in a specific network
Utility tokens differ from coins because they are not as simple as money, although they still have value.
The beauty of a utility token lies in its broad use cases. They are valued by users and investors because with utility tokens, they are granted access to products and services in a specific network.
We see this happening especially with today’s tech startups. When a digital product or service is created, startups will initiate an Initial Coin Offering or ICO which allows investors to buy their tokens to use for transactions within that startup’s ecosystem.
Let’s look at Aphid’s aBion for example, you could the aBion to buy products and services within the Aphid ecosystem, but not anywhere else. If you wanted to buy a product or service outside of the Aphid network, you would have to exchange the aBion token into fiat money such as USD or a crypto-coin like bitcoin to make those transactions.
Security tokens: coins that let you invest in real assets
Security tokens are gaining popularity for their use cases in the physical world.
Functioning just like a contract for real assets, Security tokens digitally state an individual’s stake in any asset that already has value like real estate or stocks.
Think of a security token like this. If you go to an exchange to purchase a stock you would get in return a contract stating your ownership of X shares in addition to any other perks like voting rights. When purchasing a tokenized stock, what binds you to that asset is the token which now functions as your digital contract entitling you to that asset.
Unlike a utility token that is used for transactions within a specific network, Security tokens meant to be investments. And as an investment, they fall under the same regulation of other investment assets.
When security token is issued publicly it called a Security Token Offering or STO. Unlike an ICO, STOs need to register with the appropriate financial authority for their market, such as the Securities and Exchange Commission or SEC, to prevent them from being fraudulent or misused.
As we see the terminologies in the crypto space are not always clear-cut, especially when considering the industry use of “token” and “coin”. However, the blockchain industry is still evolving and as time goes by these definitions will become more standardized and clear.
In sum, when looking at the crypto space it should be understood that coins function as money and tokens cover everything else, with security tokens functioning as investments and utility tokens functioning as a transaction currency in a specific ecosystem, just like tokens at an arcade.