Want to finally wrap your head around cryptocurrencies and cryptoassets? Here’s an ELI5 version to help get you started!

Currency Tokens (Cryptocurrencies)

Cryptocurrencies are electronic equivalents of cash — cryptographically secured digital or virtual currencies that are designed to work as a medium of exchange, a store of value, or a unit of account. Whereas existing monetary models involve banks and corporations, two parties can freely transact with one another without this need for a trusted third party, instead relying on computer code.

Probably the most popular cryptocurrency you’ve heard of is Bitcoin. Although decentralized digital currencies such as Digicash, Bit Gold and Hashcash have existed before Bitcoin, Bitcoin was the first successful decentralized digital cash system created. So what’s all the hype about that makes Bitcoin so special?

Decentralization — Unlike fiat currencies, Bitcoin is neither overseen nor controlled by a financial institution. Volunteer Bitcoin Core developers help maintain the network, while nodes, or computers, which are geographically spread around the world run the network.

Pseudonymity — Users who participate in the Bitcoin network operate on a semi-anonymous basis. All transaction history on the Bitcoin blockchain can be traced back to a public key, albeit not revealing any information about the user’s true identity.

Irreversibibility — Unlike fiat and credit card transactions, a Bitcoin transaction is immutable and permanent. Since no third party is involved in a Bitcoin transaction since transactions only involve two parties, transaction reversibility is impossible. In the case that you accidentally send someone bitcoin, you might be able to request your funds back if you ask that person. Just a reminder that you can’t call Visa or Mastercard when dealing with these chargeback issues.

Examples of currency tokens (cryptocurrencies) include Bitcoin, Litecoin, ZCash, Digibyte, Stellar Lumens, etc.

Utility Tokens

Utility tokens are essentially “access keys”, which grant users entry to a product (decentralized applications, or dApps) or service on a blockchain.

So why would a user be motivated to buy a utility token instead of a security token or platform token? There are various functionalities that exist including in-app rewards, governance and voting, as well as customization of value. Given that the supply of the token is fixed, as the network grows, the utility of the token increases as well. Consequently, this will drive the demand of the tokens, potentially spawning an upward price movement.

For instance, the Basic Attention Token (BAT) is a utility token that aims to revolutionize digital advertising via the Ethereum blockchain and the Brave web browser. Aspiring to be an enhanced version of Chrome and Firefox, Brave underlines customer privacy, anonymity, and safety. The idea behind BAT is simple: publishers are rewarded BAT for displaying their content while users are compensated for their attention in viewing the content.

Another use case is Golem, a “worldwide supercomputer” that positions itself as a marketplace for computing power. Using the Ethereum blockchain, buyers and sellers transact unused computational resources such as CPU or GPU cycles. Users are incentivized to use the Golem token, GNT, rather than ETH due to the reward system for system providers and developers as well as price fluctuations in ETH. Within the network, “requestors” can access affordable hardware and software solutions, providers get compensated for providing their resources, while software developers utilize GNT as a distribution channel.

Since utility tokens were not designed for investment purposes, they are not considered securities — at least theoretically. We’re still treading in uncharted territory here, and as such the SEC has yet to give an official statement or guidance whether utility tokens are subject to securities regulations.

Security Tokens

Securities tokens are tradable assets that represent an investment in a company. People who buy security tokens expect future returns, whether it be in the form of dividends, revenue share, or price appreciation.

To determine if something qualifies as a security, it must pass the Howey test; in other words, two questions must be answered with a yes: 1) Is the token being sold as an investment and 2) Is there a person upon whom investors rely on?

Deemed as the new “ICOs” (initial coin offering), STOs, or security token offerings are seen as the next wave in the crypto revolution. The year 2017 saw countless ICOs pulling exit scams and simply leaving the space, causing investors to be more wary of their ventures. In spite of that, since the SEC will be mandating security tokens, they are now more willing to invest in it. This much-needed regulation will drive higher liquidity to the securities market.

Cryptocollectibles

With the Internet, digital content such as photos, videos, GIFs, music, and movies can be easily duplicated, shared, and downloaded. While there have been efforts to thwart illegal Internet activity, people nevertheless find ways around it. Imagine having virtual Beanie Babies on the Internet. Now mind you, actual Beanie Babies are currently being sold on eBay for $680,000. What happens when someone with malicious intent decides to duplicate one and sell it at a higher price? How could one possibly substantiate its authenticity?

By putting virtual property on the blockchain, collectibles such as CryptoKitties and EtherTulips can be vouched for their authenticity given that every agreement, every transaction, and every payment is transparent and traceable.

Ultimately, cryptocollectibles boil down to two types: fungible and non-fungible. ERC20 tokens are fungible: they can be interchanged with other identical tokens. Bitcoin, Litecoin, Bitcoin Cash, and Ether are all instances of fungible tokens. On the other hand, ERC721 tokens on the Ethereum blockchain are non-fungible, meaning that they are completely unique and non-interchangeable with other tokens. They create digital scarcity without the need for a centralized organization to corroborate its authenticity.

Let’s take a look at CryptoKitties, one of the most well-known non-fungible tokens. Players using this dApp can breed, raise, adopt, and trade kittens. Each CryptoKitty corresponds to a particular ERC721 token. At the core, this means distinct, with its own special fur color, eyes, pattern and name. According to the website, “Each cat is one-of-a-kind and 100% owned by you; it cannot be replicated, taken away, or destroyed.”

Platform tokens

Think of platform tokens as fuel or “gas” for powering a decentralized network.

Probably one of the most well-known platform tokens is Ether, which is based on the Ethereum blockchain. With Ether, you can power decentralized applications, transactions, and smart contracts on top of the Ethereum blockchain. Unlike utility tokens, which grants entry to a product or service, platform tokens allow users to access the entire platform. Think of the Ethereum platform as the App Store and decentralized applications as iOS applications. However, the only difference is that while Apple asserts control over the App Store, no central entity has power over the Ethereum platform.

Another instance of platform tokens is Waves. The platform, which also bears the same name, enables users to issue and transfer their own custom tokens while also functioning as a decentralized exchange (DEX). Users can trade their custom tokens in exchange for other tokens on Waves. Moreover, businesses and organizations can employ Waves to issue their own tokens as part of a crowdfunding campaign, launch loyalty and rewards programs.

Other examples of platform tokens include EOS, NEO, Lisk, Cardano, and IOTA.