What Types of Tokens Are There?
There are many different tokens that exist in the crypto space. Because so many different kinds of tokens emerged in such a short amount of time, there is still a lot of confusion surrounding tokens. The following are the major categories of tokens:
What Are Dividend Tokens?
Dividend tokens offer the holder of the token a share of the profit of the organization that issued the token. Except for currency tokens, tokens typically represent some kind of investment contract that promises some kind of profit or potential income opportunity. Profit comes in many different forms. Value appreciation, mining operations, investment profits are just a few examples.
Some platforms share their profits by allocating dividends among token holders. Some blockchains have features that are akin to dividends without actually having designated dividend tokens.
Some dividend tokens come with voting rights, but not all of them do. Dividends share some things in common with stocks, but they are different. A major difference is that with dividend tokens the holder has a source of passive income, but they don’t necessarily hold any ownership in the organization.
Staking/ Proof of Stake is also similar in concept to dividends. A staker keeps their tokens in a special wallet and receives payouts for the length of time that they hold the tokens.
Dividend payouts can differ from one dividend token to the next. Weekly payouts and monthly payouts are the most common, but there are other options. In some cases, the frequency of the payout could depend on how many tokens you currently hold. Larger token holders may have priority over smaller ones.
How Are Utility Tokens Different From Security Tokens?
The big difference is that securities tokens are always about profit, but utility tokens aren’t necessarily about profit. The term utility token was originally meant to differentiate certain tokens from cryptocurrency coins. The advent of blockchain has allowed organizations to create entire networks of services and products. Utility tokens are what allow people to use and interact with these networks.
In its most basic form, securities tokens are tokens that offer the user the potential of passive income in the future. Utility tokens don’t necessarily represent an investment contract but securities tokens always do. If the token “emphasizes the potential for profits based on the entrepreneurial or managerial efforts of others” the US Securities and Exchange Commission would interpret them as a securities.
What makes it confusing is that there is no uniform definition of what constitutes a securities tokens that works across every country and every industry.
What Are The Advantages of Income From Dividend Tokens?
The biggest advantage comes from the power of passive income.Passive income means you receive regular rewards for something you did in the past, such as acquiring dividend tokens and requires no additional work. There are many different strategies for passive income, but dividends are one of the best. Dividend tokens pay holders a recurrent reward even if you don’t make additional investments in the organization. Even during a bear market, the holder can earn passive income if the organization in question has a strong enough business model.
One example is Nexo.io. This company provides cryptocurrency-backed loans. The NEXO dividend token provides a payout of 30% of the company’s overall profits to token holders every month. The payouts are in the form of ETH and distributed to Nexo investors according to how many tokens they have.
The concept isn’t new. The idea of an asset that yields a dividend stems from the stock market. Here, investors receive dividends from shares that they have in a company. Oftentimes, the return from dividends matches or even surpasses the original investment. The cryptocurrency market arguably offers more potential for returns than capital markets.
Reinvesting dividends can compound payoffs and provide an opportunity to investors to multiply their original investment. They have even more potential if interest rates are negative.
How Are Dividend Tokens Regulated?
This depends on what country you live in. In the United States, dividend tokens are considered a form of securities. In general dividend tokens still constitute a gray area. In general, establishing a regulatory framework for a digital asset that works for every country worldwide is an incredibly difficult task, especially all of these assets are relatively new.
The most challenging part about regulating a token economy is that tokens have such a large range in what they can offer. There is an array of different tangible and intangible services and goods that a holder of a token can gain access to. Legally, there is a huge difference between a physical commodity, for example, and purchasing rights to securities. This diversity means that different tokens will fall under the purview of different laws. In some cases, there will also be overlap. In rare cases, they won’t fall into any category.
That said, various regulators are making efforts to establish a regulatory framework for the token economy. The Securities And Exchange Commission is one of the biggest watchdogs of the token economy. To them, any token that promises future profit falls under the category of securities. There are some utility tokens, securities tokens, and many other tokens that fit with this definition.
By this definition, dividend tokens also fall into the category of securities. They offer investors the chance to have a passive income. As such, the Securities And Exchange Commission wants to have jurisdiction over regulating dividend tokens in the US.
What Are The Benefits Of Dividend Tokens?
Dividends are a simple form of passive income. Many token investments have strings attached. You might have to meet a laundry list of criteria to ever see a profit. Dividend tokens are much more straightforward. If you hold dividend tokens, you are eligible for the rewards.
Dividend tokens also have all the benefits that come with blockchain technology. Especially when the tokens are regulated, dividend tokens are transparent, secure, and often anonymous. Many asset classes aren’t transparent, so this is a huge benefit.
For a dividend token to be successful, the organization issuing them needs to be profitable. Often times when investing in token, you’re going in practically blind because most organizations are not transparent. An organization isn’t going to issue dividend tokens unless they know that their services and business plans have the ability to turn a solid profit. You can have a little more faith in the organizations financial holding than in most alternatives, although nothing is ever certain.
What Are The Shortcomings Of Dividend Tokens?
The biggest flaw is a lack of predictability. Th dividend payouts can be hard to predict because they might depend on how many tokens users hold or how well the organization is meeting milestones. In addition, the rules governing the dividend tokens can change at the whim of the issuer. This is true of most blockchain projects.
In some cases, dividends are distributed only when individual payout amounts reach a targeted goal. This would be done to minimize transaction fees. As mentioned early, issuers often give payouts to users who have the greatest amount of tokens first. Thus, smaller token holders often have a disadvantage over larger ones.
If the payouts depend on organizational goals and milestones, individual investors have no control over the payout frequency whatsoever. Together, all this means that payouts may or may not be predictable.
What Is The Best Application Of Dividend Tokens?
What makes dividend tokens stand out is that they have versatile. Moreover, they can add liquidity to the owner and the system as a whole.
As a type of financial asset, the best application of dividend tokens is for financial and investment enterprises. They can be used for cryptocurrency investment funds, or as a way to distribute a part of an organization’s upside as a dividend. Companies who are investing in crypto mining operations can also use these tokens to share a portion of profits with token holders.
But this is just a few examples. Dividend tokens have many different possible applications. They are very versatile. They can even be used for proof-of-stake currencies. Lots of investment projects that are related to blockchain can use them.
For token holders, dividend tokens can make the monetary value of digital assets available to them. Token holders have the opportunity to get payments in addition to what the underlying asset’s value is.
A recent study by Latoken suggests that capitalization of cryptocurrencies might surpass $5 trillion by 2025. The number of people who have cryptocurrency wallets increases every day, which suggests that capitalization of cryptocurrencies is going to continue to rise. Yet, many of the tokens out there have no real uses. In some instances, the token is so tied to the blockchain project that it really has no use, while others are burdened by regulations.
The rapid expansion of cryptocurrencies is generally good for the digital economy, yet this also means the sheer number of unused tokens will also grow. Having thousands of digital tokens that provide no real use to token holders is silly and unnecessary. Cryptocurrency-related assets have a lot of potential. If cryptocurrency owners have more ability to benefit from investment opportunities, especially investments that necessitate liquid cash, there is no telling how this would revolutionize the market.
Dividend tokens are different because they have actual value to the people who hold them. Dividend tokens and companies like Nexo could play an important role in the coming years in transforming the crypto market.