In the fast-evolving world of blockchain and cryptocurrencies, tokens play a foundational role. They are more than just digital assets—they represent ownership, access, utility, and even governance within decentralized ecosystems. Whether you're new to crypto or looking to deepen your understanding, this guide will walk you through the essential types of tokens, how they function, and why they matter.
We’ll break down the two primary categories: native tokens and smart contract-based tokens, with a focus on popular standards like ERC-20, and explore key subtypes such as stablecoins and utility tokens.
Understanding Native Tokens
Native tokens are the core cryptocurrencies built directly into a blockchain’s protocol. These tokens are essential for the network’s operation, serving multiple critical functions:
- Paying for transaction fees (commonly known as gas fees)
- Incentivizing validators or miners who secure the network
- Facilitating on-chain governance in some cases
Because every interaction on a blockchain requires computational resources, users must pay in the chain’s native token. For example:
- On Ethereum, transactions require ETH
- On Solana, users spend SOL
- On Binance Smart Chain, the native token is BNB
These tokens aren’t just for payments—they also align incentives across the network. Validators stake native tokens to participate in consensus mechanisms (like proof-of-stake), helping maintain decentralization and security.
👉 Discover how native tokens power real-world blockchain applications today.
Smart Contract-Based Tokens: The Rise of Interoperability
While native tokens are intrinsic to their respective blockchains, smart contract-based tokens are created on top of existing blockchains. These tokens rely on standardized frameworks that ensure compatibility across wallets, exchanges, and decentralized applications (DApps).
The most widely adopted standard is ERC-20, introduced on the Ethereum network in 2015. ERC-20 defined a set of rules—such as how tokens are transferred and how data is accessed—making it easier for developers to build interoperable applications.
Other chains have developed similar standards:
- Binance Smart Chain uses BEP-20
- Polygon has its own ERC-20-compatible implementation
By using these standards, projects can launch their own tokens without reinventing the wheel, significantly lowering development costs and time-to-market.
What Is ERC-20?
ERC-20 is a technical standard used for issuing fungible tokens on the Ethereum blockchain. It specifies six mandatory functions (and three optional ones) that every compliant token must implement. This uniformity allows:
- Seamless integration with Ethereum wallets (like MetaMask)
- Listing on major exchanges
- Use in decentralized finance (DeFi) protocols
Creating an ERC-20 token involves deploying a smart contract that follows these rules. Once live, the token can be distributed via sales, airdrops, or rewards.
This standardization has fueled innovation—enabling everything from governance tokens to loyalty points—all built on one shared infrastructure.
Exploring Common ERC-20 Token Types
Not all tokens serve the same purpose. Below are two major categories of smart contract-based tokens that dominate today’s ecosystem.
Stablecoins: Bridging Stability and Decentralization
In a market known for volatility, stablecoins provide much-needed price stability. Pegged to stable assets like the US dollar or gold, they combine the benefits of traditional finance with the speed and accessibility of crypto.
There are three main types of stablecoins:
1. Fiat-Collateralized Stablecoins
Backed 1:1 by reserves of fiat currency (usually USD), these are issued by centralized entities that hold the underlying cash in bank accounts. Transparency and audits are crucial for trust.
Popular examples include:
- Tether (USDT)
- USD Coin (USDC)
These dominate the stablecoin market due to their reliability and wide acceptance across platforms.
2. Crypto-Collateralized Stablecoins
These are backed not by fiat, but by other cryptocurrencies—typically over-collateralized to absorb price swings. For instance, $5 worth of ETH might back $1 of stablecoin to mitigate risk.
The most well-known example is:
- Dai (DAI) – created by MakerDAO
DAI uses a system of smart contracts called "CDPs" (Collateralized Debt Positions) to issue stablecoins while maintaining decentralization.
3. Algorithmic Stablecoins
Unlike collateralized versions, algorithmic stablecoins use code to regulate supply based on demand. When prices drop below $1, the system reduces supply (by burning tokens); when prices rise, it increases supply (by minting new tokens).
A notable example was:
- TerraUSD (UST) – which lost its peg in May 2022 during a market crisis
While promising in theory, algorithmic models face significant challenges in extreme market conditions.
👉 Learn how stablecoins are reshaping global payments and DeFi strategies.
Utility Tokens: Powering Decentralized Applications
Also known as application tokens, these give users access to specific features within a DApp or platform. Their functions vary widely but often include:
- Governance rights (voting on upgrades)
- Revenue sharing or staking rewards
- Discounts on platform fees
- Access to exclusive services
Take Uniswap, a leading decentralized exchange. Its token, UNI, allows holders to:
- Vote on protocol changes
- Influence fee structures
- Participate in community decisions
Similarly, many centralized exchanges issue their own utility tokens. While not covered here, such tokens often offer perks like reduced trading fees or exclusive event access.
Utility tokens align user incentives with platform growth—turning users into stakeholders.
Frequently Asked Questions (FAQ)
Q: What’s the difference between a coin and a token?
A: Coins typically refer to native assets of a blockchain (like ETH or BTC), while tokens are built on top of existing blockchains using smart contracts (like USDC or UNI). Coins secure networks; tokens enable applications.
Q: Can anyone create a token?
A: Yes—anyone with basic coding knowledge can deploy an ERC-20 token on Ethereum. However, creating a valuable token requires strong use cases, community trust, and clear utility.
Q: Are all stablecoins safe?
A: Not equally. Fiat-backed stablecoins depend on issuer transparency. Crypto-collateralized ones rely on over-collateralization. Algorithmic models carry higher risks due to lack of backing. Always research before holding.
Q: How do I store different token types?
A: Most ERC-20 and BEP-20 tokens can be stored in compatible wallets like MetaMask, Trust Wallet, or hardware wallets like Ledger—just ensure the wallet supports the blockchain you're using.
Q: Why is ERC-20 so important?
A: ERC-20 created a universal framework that made token creation and integration predictable and secure. It laid the foundation for DeFi, NFTs, and Web3 economies.
Q: Can tokens lose value?
A: Absolutely. Even stablecoins can depeg during crises. Utility tokens may decline if the platform loses users. Always assess project fundamentals before investing.
Final Thoughts: Tokens as Building Blocks of Web3
Tokens are more than speculative assets—they are functional components of decentralized systems. From securing networks (native tokens) to enabling complex financial instruments (stablecoins) and empowering user governance (utility tokens), they form the backbone of blockchain innovation.
As Web3 continues to grow, understanding token types becomes essential for investors, developers, and everyday users alike.
Whether you're exploring DeFi, trading on exchanges, or participating in DAOs, knowing what each token represents helps you make smarter, more informed decisions.
👉 Start exploring tokenized ecosystems and discover new opportunities in crypto today.