What are tokens?What are tokens?

Tokens and cryptocurrencies are often mentioned in the same breath, but there's an important difference between them. In everyday use that doesn't matter much. For anyone who wants to invest or build, it does. We'll set out coins, altcoins and tokens briefly, and further down we'll go deeper into the difference between security tokens and utility tokens.

• Coin: a digital currency with its own blockchain. Bitcoin is the best known, but Ethereum, Solana and Litecoin are coins too.
• Altcoin: any coin that isn't bitcoin. The word comes from alternative coin. Anyone talking about "alts" means this group.
• Token: a digital item that lives on an existing blockchain, often Ethereum's. A token therefore has no blockchain of its own, but borrows one from another coin.

Sometimes a project shifts from token to coin. A well-known example is EOS: it started as a token on Ethereum and later got its own blockchain, and from that moment on it became a coin.

Tokens come in two main types: security tokens and utility tokens. The difference comes down to regulation and to what the token represents.

Security tokens are the digital equivalent of what we call securities: think of shares, bonds or options. They give a right to a piece of ownership or profit in a company, and they fall under the supervision of financial regulators such as the AFM in the Netherlands or the SEC in the US. Examples: Aspen Coin (a share in a ski resort), tokenised real estate.

Utility tokens give access to a product or service. You pay in advance for something the company will deliver later. No shares, no profit distribution, simply a digital access pass. Examples: Basic Attention Token (to reward advertisers on the Brave browser), Filecoin (to buy data storage).

In practice the line isn't always sharp. A utility token can be classified as a security by a regulator if it's mainly bought to speculate on, and the SEC has done exactly that several times.

Tokens are usually issued through one of these methods:

• ICO (Initial Coin Offering): comparable to a stock market listing. The company issues a token and investors buy them with, for example, bitcoin or ether. Popular between 2016 and 2018, heavily regulated after that.
• STO (Security Token Offering): like an ICO, but specifically for security tokens. Under stricter supervision and a legal framework.
• Airdrop: the issuer sends free tokens to existing wallet addresses, often to get a network going.
• Bonding curve / DEX launch: a more modern method where the token is offered through a decentralised exchange (such as Uniswap) at an algorithmically determined price.

Which method is used says something about the project. ICOs had a wild-west phase with many scams; STOs are better regulated but more expensive for the issuer.