a16z: Understanding 7 Token Categories and Where Cryptographic Asset Value Comes From
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a16z: Understanding 7 Token Categories and Where Cryptographic Asset Value Comes From
Tokens enable true digital ownership.
Navigating Web3 tides with focused insightsAuthors: Miles Jennings, Scott Duke Kominers, Eddy Lazzarin
Translation: TechFlow
As activity and innovation around token-based network models continue to grow, builders are asking how to differentiate between different types of tokens—and which token might be best for their business. At the same time, both consumers and policymakers are striving to better understand the roles and risks of blockchain tokens in applications.
To help organize this conversation, we provide definitions, examples, and a framework to help you understand the seven most common categories of tokens used by entrepreneurs: network tokens, security tokens, company-backed tokens, utility tokens, collectible tokens, asset-backed tokens, and memecoins. We outline them in more detail below.
Quick Recap: Tokens and Their Characteristics
At their core, tokens enable true digital ownership.
More precisely, blockchains are decentralized computers made up of networks of individual computers that maintain shared ledgers—essentially a "computer in the sky" (as described here). Tokens are data entries on these ledgers that can track quantities, permissions, and other metadata. Crucially, these records can only be changed according to rules encoded on the blockchain, which can be used to grant enforceable rights.
Beneath this precision lies many details affecting design, functionality, value, and risk: Because tokens are embedded in software, they can be programmed to represent almost anything—any digital form or record of property. This means tokens can be designed as digital stores of value like Bitcoin; productive and consumptive assets like Ethereum; collectibles such as digital trading cards and in-game items; stablecoins for payments like USDC; or even digitized stocks.
Some tokens grant holders various rights (e.g., voting or economic rights), while others merely allow access to a product or network service. Some tokens are transferable among users, others are not. Some tokens are fungible—meaning all units are equivalent (like dollar bills)—while others are non-fungible, representing unique individual assets (one-of-a-kind, like trading cards or even the Mona Lisa).
These design choices matter because they determine whether a token is a good store of value or medium of exchange; whether it’s a productive asset with intrinsic utility and/or economic value; or whether it's essentially worthless. The characteristics of a specific token also determine how it will be treated under applicable laws.
Therefore, whether you're building a blockchain-based project, investing in tokens, or simply using them as a consumer, understanding what to look for is crucial. It’s important not to confuse memecoins with network tokens. The rest of this article aims to clarify that confusion.
Types of Tokens
Network Tokens
Network tokens are intrinsically tied to the programmable functions of a blockchain or smart contract protocol, and derive their value from this linkage.
Network tokens typically have built-in utility; they can be used for network operations, achieving consensus, coordinating protocol upgrades, or incentivizing network participation. The networks associated with these tokens often (and ideally should) include economic mechanisms that drive token value. These include programmatic buybacks, dividends, and other changes to total token supply via token creation (“faucets”) or destruction (“sinks”), introducing inflationary and deflationary pressures to serve the network.
Network tokens may exhibit trust dependencies similar to commodities and securities. Recognizing this, the SEC’s 2019 Framework and the FIT21 Act both state that network tokens fall outside U.S. securities law when decentralization of the underlying network mitigates these trust dependencies. The core idea of decentralization is that the system can operate without human control (by individuals, companies, or management teams).
Network tokens are best suited for bootstrapping new networks, distributing ownership or governance of a network to its users, and/or ensuring self-sustained, secure operation. Examples of network tokens include DOGE, BTC on Bitcoin, ETH on Ethereum, SOL on Solana, and UNI on Uniswap. In the context of smart contract protocols like Uniswap and Aave, network tokens are sometimes also called “protocol tokens” or “application tokens.”
Security Tokens
Security tokens represent the digital form of a security, which could be a traditional instrument (such as company stock or corporate bonds) or have special features, such as granting profit interests in an LLC (profits interest), shares of an athlete’s future income, or even securitized rights to future lawsuit settlements.
Securities typically confer certain rights, ownership, or interests to holders, and issuers usually have unilateral power to influence or structure the risks associated with the asset. As the U.S. Securities and Exchange Commission moves toward modernizing securities laws to allow on-chain trading, the number and variety of tokenized securities may increase, potentially improving efficiency and liquidity in securities markets. However, even as the category grows, digital securities remain subject to U.S. securities regulations.
Security tokens have been used to raise capital for commercial enterprises. Examples include Etherfuse Stablebonds and Aspen Coin, which represents partial ownership of the Aspen St. Regis Resort.
Company-Backed Tokens
Company-backed tokens are inherently linked to off-chain applications, products, or services operated by a company (or other centralized organization), and derive their value from them.
Like network tokens, company-backed tokens may use blockchain and smart contracts (e.g., for facilitating payments). But since they are primarily tied to off-chain operations rather than network ownership, the issuing company can unilaterally control their issuance, utility, and value. Like utility tokens (described below), company-backed tokens often have embedded utility. Unlike utility tokens, however, company-backed tokens tend to be speculative.
Given these characteristics—although company-backed tokens do not typically grant holders explicit rights, ownership, or interests like traditional securities—they share securities-like trust dependencies: their value fundamentally depends on systems controlled by individuals, companies, or management teams. Therefore, while company-backed tokens themselves are not securities, transactions involving them may fall under U.S. securities laws when they attract investment.
Company-backed tokens could become a legitimate category. Historically in the U.S., however, they’ve often been used to circumvent securities regulations—raising funds for company-controlled applications, products, or services, potentially serving as proxies for equity or profit interests. Examples include FTT, which functioned as a profit interest in the FTX exchange, or a hypothetical cloud service provider issuing tokens that grant access to cloud services and entitle holders to a share of on-chain revenue from those services. Meanwhile, BNB serves as an example of a company-backed token that evolved into a network token with the launch of Binance Smart Chain. Company-backed tokens are sometimes referred to as “startup tokens,” or, given their link to off-chain applications, “app tokens.”
For more on the distinction between network tokens and company-backed tokens (including FTT), read “Network Tokens vs. Company-Backed Tokens.”
Utility Tokens
Utility tokens provide functionality within a system and are not intended for investment purposes. They often serve as currency within digital economies—for example, digital gold in games, loyalty points in membership programs, or redeemable credits for digital goods and services.
Critically, utility tokens differ from security tokens, network tokens, and company-backed tokens because they are specifically designed to discourage speculation. For instance, such tokens may lack supply caps (meaning infinite minting is possible) and/or have limited transferability; they may expire or depreciate if unused, or may only hold monetary value and utility within the system where they were issued. Most importantly, they do not offer, promise, or imply financial returns. Because they are unsuitable as investment vehicles, utility tokens generally fall outside the scope of U.S. securities laws.
Utility tokens are best used as currency within digital economies, where the issuer benefits economically by controlling the economy’s monetary policy (acting as a central bank) and maintaining stable token value, rather than profiting from token appreciation. Examples include FLY, the loyalty and payment token for the Blackbird restaurant network. Another is Pocketful of Quarters, an in-game asset that received no-action relief from the SEC in 2019 here. Robux and Star Alliance Points are not yet tokenized but otherwise exemplify the concept of utility tokens. Utility tokens are sometimes also called “utility tokens,” “loyalty tokens,” or “points.”
Collectible Tokens
Collectible tokens derive value, utility, or significance from records of ownership over tangible or intangible goods. For example, they may represent digital analogs or representations of artworks, musical works, or literary creations; collectibles or commodities like concert stubs; memberships in clubs or communities; or assets in games or the metaverse, such as digital swords or plots of metaverse land.
These tokens are typically non-fungible and often have utility. For instance, a collectible token can act as a license or ticket to an event; be used in video games (like that sword); or confer ownership rights related to intellectual property . Since collectible tokens are usually tied to finished goods or products and do not depend on third-party efforts, they typically fall outside the scope of U.S. securities laws.
Collectible tokens are best suited for conveying ownership of tangible or intangible goods. Many (though not all) “NFTs” fall into this category. Examples include NFTs that convey ownership of digital art or other media; profile pictures (“pfps”) like CryptoPunks and Bored Apes, as well as other virtual fashion and branded merchandise; in-game items; and account records or identifiers (such as ENS domains).
Some collectible tokens are directly linked to physical products, either providing a digital extension of a physical experience, such as Pudgy Penguins toys and Generative Goods collectible cards; or offering digital representations of physical goods to facilitate tracking and/or exchange, such as NFT event tickets and BAXUS’s Vault Spirits NFTs.
Asset-Backed Tokens
Asset-backed tokens derive value from claims on or economic exposure to one or more underlying assets. These underlying assets may include real-world assets (such as commodities, fiat currencies, or securities) or digital assets (such as cryptocurrencies or liquidity pool positions).
Asset-backed tokens may be fully or partially collateralized and serve various purposes: acting as stores of value, hedging tools, or on-chain financial primitives. Unlike collectible tokens, which gain value from ownership of unique goods (like digital art, in-game items, or event tickets), asset-backed tokens function more like financial instruments, deriving value from their collateral, price peg mechanisms, or redemption rights. However, regulatory treatment of asset-backed tokens depends on their structure and use. Some tokens, such as fiat-backed stablecoins, generally fall outside U.S. securities regulation. Others, such as certain derivative tokens, may be subject to securities or commodities regulations if they represent investment contracts or futures-like instruments.
Use cases for asset-backed tokens include:
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Stablecoins, pegged to currencies or assets;
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Derivative tokens, providing synthetic exposure to underlying assets or financial positions;
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Liquidity Provider (LP) tokens, representing claims on pooled assets in decentralized finance (DeFi) protocols;
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Deposit receipt tokens, representing staked or custodied assets.
Examples include USDC (a fiat-backed stablecoin), Compound’s cTokens (an LP token), Lido’s stETH (a liquid staking token), and OPYN’s Squeeth (a derivative token tracking ETH prices).
Memecoins
Memecoins are tokens without intrinsic utility or value, typically associated with internet memes or community-driven movements, and lacking fundamental ties to a network, company, or application.
Memecoin prices are driven entirely by speculation and market dynamics, making them highly susceptible to manipulation. Their defining features are the absence of intrinsic purpose (if they had one, they wouldn’t be memecoins), lack of utility, and resulting zero-sum nature and volatility. Memecoins are generally not subject to U.S. securities laws, but remain governed by anti-fraud and market manipulation regulations.
Examples include PEPE, SHIB, and TRUMP.
Not all tokens fit neatly into one of these categories—entrepreneurs regularly iterate and experiment with new models. For example, social and reputation tokens might resemble utility tokens if they’re non-investable, or company-backed tokens if centrally issued. Tokens can also evolve from one category to another as their characteristics change or new functionalities are added, complicating classification.
But the decisive feature distinguishing these categories is the expected source of value accrual. The flowchart below helps illustrate this:
(Note: Image translated by AI; may differ slightly from original token definitions.)
Acknowledgments: We thank Chris Dixon, Tim Roughgarden, and Bill Hinman for helpful feedback; and Tim Sullivan for editorial assistance.
Miles Jennings is General Counsel at a16z crypto, advising the firm and its portfolio companies on decentralization, DAOs, governance, NFTs, and state and federal securities laws.
Scott Duke Kominers is the Sarofim-Rock Professor of Business Administration at Harvard Business School, Associate Professor of Economics at Harvard University, and Research Partner at a16z crypto. He advises multiple companies on web3 strategy and market and incentive design; further disclosures are available on his website. He is also co-author of The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create.
Eddy Lazzarin is Chief Technology Officer at a16z crypto. He leads engineering, research, and security teams that support the investment process and work with portfolio companies to build the future of the internet.
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