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ICO token classification is a topic of discussion before going in the details of present offers in the market. Earlier, we had also discussed Ethereum basics. ICO token classification is an extension of that series.
Initial Coin Offering (ICO) can be understood to be something like a stock IPO (with some differences). Startup companies raise capital by crowd-sourcing in a much easier way as compared to getting the funding from a venture capitalist. We also discussed that tokens are coins offered during an ICO which are digital or virtual currency using cryptography and other blockchain techniques for security. There are some tokens which are eligible for getting dividends and have voting rights while others are not.
The startup companies raise capital for a project or economy. In some cases, the investors become consumers of the service or product offered. But, investors often struggle to take a decision on whether to invest in a particular ICO token sale. They need to discern what category an ICO token falls into.
This is a basic write-up for the blockchain beginners to understand the associated ICO token classifications. Three major categories of crypto tokens are:
Utility ICO Token
Utility tokens give users the ability to use a platform, product or service within a blockchain based platform. They are required to access them. Utility tokens are also called app coins or app tokens as they provide users with access to a product or service. The best example for a utility token can be take paid services of an API in the Internet space.
There are numerous examples of utility tokens where they provide services like cloud storage, exchange services, software utility services and many more. ICO contributors receive tokens that will be used to purchase the service once they are launched.
Utility token is distinct to any organization, hence they are not legal identity. The SEC (Securities and Exchange Commission) does not give any official guidance on utility tokens. Hence there are not subject to securities regulations.
Security ICO Token
These are sometimes also called asset-backed tokens. Security tokens signify a physical asset. They have a greater level of security within the physical asset market. Due to physical asset participation, these are subject to security regulations. In terms of economic functions, they can be said to be analogous to equities or equity-like securities.
As others, security tokens are tradable. These are a less popular choice because the token price is designed to be the same as the physical asset to which it is tied.
Equity ICO Token
Equity tokens give buyers ownership of the project. Equity tokens give an equitable right to a portion of the project to the buyer. This is why equity ICO tokens are viewed as digital shares in a company.
The startups overcome the barriers to enter the financial markets by issuing Equity Tokens. They are considered to make stock trading accessible to the average investor by taking a role in corporate governance. Being blockchain based, they encourage voting to be conducted transparently through the blockchain.
One of the most promising applications of Ethereum-based smart contracts is the potential for startups to issue stock–or equity tokens–through initial coin offerings. This will benefit startups since the barrier to entry into the financial markets will be much lower than in the past.
Reputation/Reward ICO Token
There is one more breed of tokens called Reputation or Reward Token. These ICO tokens are used to create trustworthiness. Users acquire these tokens on participation in a particular blockchain platform. An example of a reward token can be a distribution of token when a service is used by the user.
Finally, we shall discuss digital currencies. We all know about it as they are the most popular of all digital tokens. Majority of crypto tokens fall under this category. They are also known as cryptocurrencies, currency tokens as well as digital coins. I shall not write much on this but just like to make you remember that, digital currencies are based on distributed ledger technology facilitating easy and fast peer-to-peer transactions.
The largest and most valuable of these is bitcoin. Others, as we know, are Ethereum, Litecoin, Monero, Ripple. I have lots of writing material on each one of them but I will not write much here.
We shall discuss other ICO token details in upcoming blogs.
Cheers! ! ! !