Web3 tokens are a fundamental concept in the emerging web3 ecosystem. These tokens represent digital assets that are built on blockchain technology, that uses smart contracts to establish their functionality and properties. While web2 tokens were predominantly used for access, loyalty, or rewards within centralized platforms, web3 tokens bring a new level of programmability and decentralization to the table.
One of the key characteristics of web3 tokens is their interoperability. They are designed to be compatible with various applications and platforms within the web3 ecosystem, allowing users to easily transfer and utilize them across different services. This interoperability is made possible through standardized protocols and token standards such as ERC-20 on the Ethereum blockchain, that we mention in this article.
Furthermore, web3 tokens enable a wide range of use cases and functionalities. They can represent various types of digital assets, including cryptocurrencies, utility tokens, governance tokens, non-fungible tokens (NFTs), and more. These tokens can be used for purposes such as decentralized finance (DeFi), decentralized applications (dApps), voting and governance systems, digital collectibles, and tokenized assets.
What are the most common types of tokens?
Cryptocurrencies: That's right, cryptocurrencies are also tokens. These tokens are designed to function as digital currencies, serving as a medium of exchange and a store of value. Examples include Bitcoin (BTC) and Ethereum (ETH).
Utility Tokens: These tokens are used to access or pay for services within a particular platform or ecosystem. They provide users with certain privileges or benefits. Examples include Binance Coin (BNB) and Filecoin (FIL).
Governance Tokens: These tokens grant holders the right to participate in the governance and decision-making processes of a decentralized network. Holders can vote on proposals or changes to the protocol. Examples include Maker (MKR) and Compound (COMP).
Stablecoins: These tokens are designed to maintain a stable value, often pegged to a specific fiat currency like the US dollar. They provide stability in volatile cryptocurrency markets. Examples include Tether (USDT) and USD Coin (USDC).
Non-Fungible Tokens (NFTs): NFTs represent unique digital assets, such as digital art, collectibles, or virtual real estate, which cannot be replicated or replaced. Each NFT has a distinct value and ownership record. Examples include CryptoPunks and CryptoKitties.
Security Tokens: These tokens represent ownership in a traditional asset, such as equity in a company, real estate, or debt instruments. They offer investors financial rights and can be subject to regulations. Examples include tZERO and Polymath.
Wrapped Tokens: These tokens represent other digital assets "wrapped" on a different blockchain. They enable cross-chain compatibility and allow assets to be used in different ecosystems. Examples include Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH).
Asset-backed Tokens: These tokens are backed by physical assets, such as precious metals, real estate, or commodities. They offer digital representation and fractional ownership of these assets. Examples include Paxos Gold (PAXG) and DigixDAO (DGD).