In the blockchain space, tokens are more than just digital currencies; they represent a broad spectrum of assets and utilities. This article explores the seven primary token categories, detailing their definitions, characteristics, and applications. By understanding these distinctions, entrepreneurs and investors can better navigate the opportunities and risks associated with each type.
Understanding Tokens and Their Core Features
At their essence, tokens enable true digital ownership. They are data records on a decentralized ledger—a "computer in the sky"—that track quantity, permissions, and other metadata. These records can only be altered based on encoded blockchain rules, which can grant executable rights.
Tokens can be programmed to represent almost any form of digital asset, from stores of value like Bitcoin to productive assets like Ethereum, collectibles such as digital trading cards, or even equity shares. Some tokens offer holders rights like voting or economic benefits, while others simply enable access to services. They can be fungible (interchangeable, like dollar bills) or non-fungible (unique, like a one-of-a-kind artwork).
Design choices determine whether a token serves as a good store of value, medium of exchange, or productive asset. They also influence legal treatment under applicable laws. For builders, investors, and consumers, recognizing these differences is crucial to avoiding confusion—such as mistaking memecoins for network tokens.
The Seven Token Categories
Network Tokens
Network tokens derive value from their intrinsic link to a blockchain or smart contract protocol’s functionality. They often feature embedded utility, facilitating network operations, consensus formation, protocol upgrades, or incentivizing behaviors. Economic mechanisms like programmatic buybacks, dividends, or token burns introduce inflation or deflationary pressures to serve the network.
These tokens may involve trust dependencies similar to commodities or securities. However, frameworks like the SEC’s 2019 guidance and FIT21 suggest that when decentralization mitigates these dependencies—meaning the system operates without human control—network tokens can fall outside U.S. securities laws.
Network tokens are ideal for bootstrapping new networks, distributing ownership or control to users, or ensuring self-funded, secure operations. Examples include Bitcoin (BTC), Ethereum (ETH), Solana (SOL), and Uniswap (UNI). In smart contract contexts, they’re sometimes called “protocol tokens” or “application tokens.”
Security Tokens
Security tokens digitize traditional securities, such as company shares or bonds, or unique instruments like profit interests in LLCs or shares in future revenue streams (e.g., athlete earnings). They confer rights, ownership, or benefits, with issuers often holding unilateral power to structure risk.
As SEC modernization may enable on-chain trading, more securities are likely to be tokenized, bringing efficiency and liquidity to markets. Nonetheless, digital securities remain subject to U.S. securities laws. Examples include Etherfuse Stablebonds and Aspen Coin, which represents fractional ownership of the St. Regis Aspen Resort.
Company-Backed Tokens
Company-backed tokens derive value from off-chain applications, products, or services operated by a centralized entity. While they may use blockchain for functions like payments, their issuance, use, and value are controlled unilaterally by the company.
These tokens share trust similarities with securities, as their value depends on a system managed by people or organizations. Though not inherently securities, they often attract investment in ways that subject them to U.S. securities laws. Historically, they’ve been used to circumvent regulations by acting as proxies for equity or profit interests.
Examples include FTT, which functioned as a profit share for FTX, or a hypothetical cloud service token offering revenue shares. BNB evolved from a company-backed token to a network token after launching Binance Smart Chain. They’re also known as “startup tokens” or “app tokens.”
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Game Tokens
Game tokens provide utility within a closed system and are not designed for investment. They act as in-economy currencies, with features like unlimited supply, limited transferability, or expiration to discourage speculation. Crucially, they promise no financial returns.
These tokens excel as stable currencies where issuers benefit from controlling monetary policy—akin to a central bank—rather than token appreciation. Examples include FLY, a loyalty and payment token for the Blackbird restaurant network, and Pocketful of Quarters, which received SEC no-action relief in 2019. Non-tokenized analogs include Robux and Star Alliance Points. They’re also called “utility tokens,” “loyalty tokens,” or “points.”
Collectible Tokens
Collectible tokens derive value from representing ownership of tangible or intangible goods, such as digital art, music, event tickets, memberships, or in-game assets. They’re often non-fungible and may include utility, like licensing rights or in-game use.
Since they typically involve completed works without relying on third-party efforts, they’re generally excluded from U.S. securities laws. Most NFTs fall here, including CryptoPunks, Bored Apes, virtual fashion items, and ENS domains. Some tie to physical products, like Pudgy Penguins toys or Baxus’s wine NFTs, enhancing real-world experiences or enabling easier tracking and exchange.
Asset-Backed Tokens
Asset-backed tokens derive value from claims on or exposure to underlying assets, which can be real-world (e.g., commodities, fiat) or digital (e.g., cryptocurrencies). They may be fully or partially collateralized and serve as stores of value, hedges, or financial primitives.
Regulatory treatment varies: fiat-backed stablecoins often avoid securities laws, while derivative-like tokens may be subject to securities or commodities regulations. Use cases include:
- Stablecoins pegged to assets or currencies;
- Derivative tokens offering synthetic exposure;
- Liquidity provider (LP) tokens representing claims on pooled assets in DeFi;
- Deposit receipt tokens for staked or custodied assets.
Examples include USDC (fiat-backed stablecoin), Compound’s cTokens (LP tokens), Lido’s stETH (liquid staking token), and Opyn’s Squeeth (ETH price derivative).
Memecoins
Memecoins lack intrinsic utility or value, tying instead to internet memes or community movements. Their prices are driven purely by speculation and market forces, making them highly susceptible to manipulation.
With no purpose beyond speculation, they exhibit zero-sum dynamics and volatility. While generally excluded from securities laws, they remain subject to anti-fraud and market manipulation regulations. Examples include PEPE, SHIB, and TRUMP.
Navigating Token Evolution and Hybrid Models
Not every token fits neatly into one category. Entrepreneurs often iterate on models, and tokens can evolve—e.g., shifting from company-backed to network tokens as decentralization increases. Social or reputation tokens might resemble game tokens if non-investable or company-backed tokens if centrally controlled.
The key differentiator is the intended source of value accumulation. As the landscape innovates, staying informed on these categories helps participants make smarter decisions.
Frequently Asked Questions
What is the main difference between network tokens and company-backed tokens?
Network tokens are integral to decentralized protocols and derive value from network operations, often avoiding securities laws through decentralization. Company-backed tokens rely on centralized entities for value and are more likely to be treated as securities.
Can a token change categories over time?
Yes. For example, BNB started as a company-backed token for Binance but evolved into a network token after launching its blockchain. Changes in functionality or governance can reclassify tokens.
Are all NFTs considered collectible tokens?
Most NFTs are collectibles, but some may represent financial assets or securities, depending on their rights and structures. Utility-focused NFTs (e.g., event access) fit collectibles, while those offering profit shares may lean toward securities.
Why are memecoins excluded from securities laws?
Memecoins lack utility and aren’t investment contracts—their value hinges solely on speculation. However, they still face anti-fraud regulations to protect markets.
How do asset-backed tokens maintain stability?
They use collateralization (e.g., holding reserves for stablecoins) or algorithmic mechanisms to peg value to assets. Transparency and auditing are critical for trust.
What should developers consider when choosing a token model?
Align the token with project goals: network tokens for decentralization, game tokens for closed economies, security tokens for合规 investment offerings. Always assess legal implications and trust dependencies.