What is a utility token

The word cryptocurrency often refers to all digital assets, although there are several types. The two main categories are tokens and coins.

Coins are concerned with the basic monetary value. The most prominent examples of such cryptocurrencies are Ethereum (ETH) and Bitcoin (BTC).

Tokens are needed for lots of completely different things. The most common are security and utility tokens.

What is a utility token?

Utility tokens are usually issued during an ICO (initial coin offering). They give their owners access to a broader range of services and are not an investment. In essence, they are closer to advertising tools.

Utility tokens are a type of cryptocurrency asset, which in general, for certain privileges for its holders, helps the cryptocurrency project raise the necessary funds for development. By purchasing utility tokens, holders become investors in the project. They can usually be bought for various cryptocurrencies and fiat (a currency whose value is ensured by the state that issues it).

Utility tokens are stored in the buyer’s cryptocurrency wallet. The buyer can use them at any time to access bonuses or certain services of the crypto project that produced them.

Utility tokens do not give the owner a stake in the project (like governance tokens do), but they provide several benefits: tokens can be bought or sold on a discounted basis, etc.

The price of utility tokens can vary depending on how well-known the project is and what stage it is at. If it is popular and well known, the cost will be higher. The utility tokens holder can only profit if the project is successful and achieves its goals.

How do utility tokens work?

Usually, utility tokens are part of a particular project or blockchain. Therefore, the opportunities they provide holders can also be very different. In one case, it could be discounts, enhanced rewards, and access to VIP services. In another case, it may be access to an extended range of products and much more.

What are utility tokens used for?

What utility tokens are for is up to their developer. Usually, they give access to some kind of product or service available on the platform or blockchain. Therefore, they may be needed to access certain benefits.

They are essentially a piece of software, not some form of electronic money like regular cryptocurrencies. They can be used to transfer value, but that is their primary function.

A specific DEX token may be needed to exchange tokens on decentralized exchanges (DEX) or perform other decentralized finance (DeFi) manipulations. These tokens can also act as rewards for platform users or to pay interest to those who make deposits, which the platform then issues to borrowers.

Non-fungible tokens (NFTs) are also a type of useful token. But in that case, NFTs are a one-of-a-kind digital work (an image, music, or even a tweet).

Utility tokens used in ICOs can even be manipulated for fraudulent purposes. In 2017–18, new blockchain projects offered investors utility tokens and promised good rewards. In the end, buyers received nothing and were simply left without money, without even the opportunity to protect their interests in the law.

Advantages and disadvantages of utility tokens

Utility tokens serve as an excellent source of funding for early-stage projects. However, they also carry certain risks. Above, we wrote about the scams associated with them during the ICO boom of 2017–2018. And this led to a drop in confidence on the part of potential investors.

Therefore, utility tokens have several disadvantages:

• there is no mechanism to increase the value;
• if the project is closed, they lose its weight completely;
• they do not promote the adoption of cryptocurrencies;
• they do not give owners the ability to influence the project (unlike management tokens);
• liquidity problems (the project may not reach the stage where utility tokens are useful).

Utility token vs. security token

Their main difference is that security tokens allow you to participate in the project’s fate. That is, the investor, for a certain amount of money, receives at his disposal some kind of, roughly speaking, decentralized shares. Such tokens are even considered securities in the United States. For example, so decided the Securities and Exchange Commission (SEC). And therefore, security tokens are subject to the same rules as bonds, stocks, and other securities.

That said, utility tokens are not considered securities; they are not meant to be investments. But at the same time, the SEC has some criteria for what constitutes securities. And based on those, security tokens may one day be equated with securities. These attributes include the presence of:

• monetary investment;
• financial infusions by people hoping to make money;
• investors will only make money from what services or products the organization provides;
• a third party has a direct impact on the profits.

As you can see from these points, most cryptocurrencies and tokens meet the SEC criteria for securities.

How different are security tokens from utility tokens?

Security tokens are proprietary and differ from utility tokens in how their price is calculated. Security tokens are regulated by state financial market regulators and are therefore considered safer. They give holders an income that depends on the economic success of the owning company.

Security tokens give ownership of a digital or physical asset with tangible value. In doing so, they are a unique way to raise capital within the cryptocurrency market. Companies gain the ability to sell a semblance of stock digitally and give a large number of holders the ability to own at a low price. Investors get to invest in non-cryptocurrency companies while enjoying the benefits of cryptocurrency tokens.

Security tokens are regulated by government agencies, unlike utility tokens. Security tokens are issued as part of the placement process. They can represent a small monetary value of a business, allowing people in different parts of the world to own the underlying enterprise (compared to traditional stock market offerings).

Examples of utility tokens

Among the most interesting examples of utility tokens are the following:

• Basic Attention Token (BAT). This ERC-20 (Ethereum programming standards) token gives owners access to BAT services, which are used as a payment tool for content creators and publishers. The company behind BAT has issued a token to help creators of different content earn a fairer income. For example, it reduces the amount of advertising on pages with the token holder’s content.
• Golem (GNT) is part of an economic system through which available computing power can be leased. Individuals can use them for various tasks through a decentralized network.

Takeaway

The advent of blockchain technology has caused the world to change. Tokens, among other things, have emerged. Utility tokens can be used for a variety of tasks and purposes. They provide their owners with many perks: seamless transactions through a particular blockchain to making payments for decentralized services, funding promising projects, and so on.