These tokens can either be:
- Fungible: Divisible and non-unique, like the US Dollar. (My dollar is the same as your dollar, which is the same as your friend's dollar.)
- Non-Fungible: Unique, like one-of-a-kind collectibles. (My signature is not the same as your signature, even if they have the same function.)
Fungible tokens are often referred to as cryptocurrencies, while non-fungible tokens are known as NFTs.
Types of Fungible Tokens
Native Blockchain Tokens
These tokens are native to a blockchain network. They are used to pay for utilizing the network and are also called cryptocoins. If you want to transfer bitcoin to a friend, you need to pay a transaction fee native to the network - Bitcoin. If you want to interact with a smart contract such as a lending protocol on Ethereum, you pay fees in Ether (ETH) - the native token of Ethereum’s blockchain. Other examples include AVAX, SOL, BNB, and more.
Governance Tokens are issued to give holders the right to vote on issues that govern the development and operations of a protocol. It lets protocols distribute the decision-making power to their communities. Example: MKR tokens issued by MakerDao, UNI tokens issued by Uniswap.
Stablecoins have their value pegged to a stable asset such as the US Dollar, minimizing price volatility. USDC, DAI, and USDT are a few stablecoins pegged to USD.
Liquidity Provider Tokens
When users deposit tokens into a protocol, the protocol issues Liquidity Provider Tokens to the user's wallet as proof of the liquidity provided to the protocol, similar to that of a ‘receipt’ or ‘deposit slip’ provided as proof of action.
Example: When you deposit DAI, a stablecoin, into the Aave protocol, Aave issues aDAI token to the user.
Non-Fungible Tokens or NFTs
NFTs captured mainstream attention in 2021, with billions of dollars worth of NFTs being traded on marketplaces like Opensea. NFTs are tokens that are unique and can not be replicated or reproduced. They give the ability to assign or claim ownership of a unique piece of digital data, trackable using smart contracts.
NFTs can be used to log ownership of digital arts, music, or videos. A few experimental use cases around real-world assets such as tickets to real-world events and deed to real estate has also been explored.
In May 2022, Vitalik Buterin, founder of Ethereum, proposed a special kind of NFTs called Soulbound Tokens. Unlike NFTs, these tokens cannot be transferred and can be used to represent a credential, membership, or commitment.