What are utility tokens? Definition, uses, and real-world examples

As cryptocurrency grows, so does the list of complex terms to understand (like utility tokens).

In this article, we will answer the question: What are utility tokens? We will explain how these fit into blockchain systems and why they are so important for the smooth operation of decentralized applications. In the end, you will see why these tokens are important to the growth of the crypto space.

Description of utility tokens

What is a utility token? A utility token is a digital asset that can be used to purchase some services on a blockchain platform. In most cases, utility tokens are used to purchase products or services on blockchain platforms or to access certain features, such as DApp usage.

One cannot tell how valuable a utility token is until it is listed on a liquid, public crypto exchange. The value of the crypto utility token can only be determined after such a utility token is made available to the masses, and its value is then determined by market forces.

Often, the value of a utility token is narrowed down to the value proposition of the network, how it is perceived by the community, the quality of the team, the uniqueness of the product, and whether the token complies with existing laws.

In recent years, Bitcoin (BTC) has become the world’s most valuable asset due to being the first crypto asset to demonstrate blockchain technology. Ethereum is also finding success and is widely supported as the first smart contract platform.

How do utility tokens work?

Alibaba may launch a utility token that allows users in the physical world to purchase products and services through the platform. Alternatively, utility tokens can be released by a project during a crowdfunding event, through an ICO or IDO, to raise money and realize its vision/mission statement.

In this arrangement, the minted utility token allows investors to access their platform and transact using the utility token as a means of payment within the platform. ICO/IDO tokens are not meant to make a profit, but to increase the value of the project, create a network effect and trigger mass interest in any product or value proposition.

Benefits of utility tokens

Think of utility tokens as your all-access pass to a blockchain project. They unlock special features, services and content that regular users cannot get. Whether it’s discounts on platform products or rewards for participating through staking, these tokens give you more than just access; It allows you to have a share in the ecosystem. They allow you to interact directly with the platform, increasing your engagement and investment in its success. These are also the fuel for transactions and smart contracts, keeping everything running smoothly. As a result, utility tokens not only improve your experience but also ensure that the platform operates efficiently.

Examples of utility tokens

There are numerous examples of utility tokens that show how they add real value to blockchain ecosystems. As mentioned earlier, one prominent example is Ethereum (ETH), which is used to pay for transaction fees and computational services on the Ethereum network. Binance Coin (BNB) is another major player offering discounted trading fees and access to various services within the Binance ecosystem. Chainlink (LINK), which enables decentralized oracle services for smart contracts, is also a great example. Another example is Uniswap (UNI), which powers a decentralized exchange and allows users to vote on governance decisions. Finally, Tether (USDT), although primarily known as a stablecoin, acts as a utility token on various platforms, allowing for fast and low-cost transactions in the crypto space.

How to create utility tokens?

Cryptocurrency exchanges, staking protocols, metadata, lending platforms and sidechains are common issuers of utility tokens. Typically, the issuance model involves a limited supply of tokens distributed among the project team, ecosystem, investors and users according to predetermined rules. Some tokens are locked to be released gradually over time.

The most popular utility tokens are listed through Initial Coin Offerings, where investors purchase tokens at minimum prices and help blockchain startups raise funds. Investors are motivated by the possibility of unique privileges or potential post-ICO token price increases.

Another way utility tokens are released is through Token Generation Events. These are time-limited events where tokens are created and offered for sale publicly or privately. TGEs aren’t just about fundraising; they are also about making a splash and involving the community from day one.

Utility tokens and security tokens

As mentioned earlier, utility tokens are often used to access a specific feature or service on a blockchain platform.

For example, the Augur platform uses its token, REP, to allow users to make predictions about the outcomes of events. The Filecoin network uses its own token, FIL, to incentivize users to provide storage space on the network.

Security tokens, on the other hand, are tokens that represent an investment in a company or asset. These are typically issued by companies during a Security Token offering (STO) and can be traded on secondary markets. Security tokens are subject to federal securities regulations under the SEC in the United States. An example of a security token is NEXO.

Both utility and security tokens have their own advantages and disadvantages. Utility tokens are generally more volatile than security tokens because they are not backed by a physical asset or regulated by government agencies. Meanwhile, security tokens are generally more stable because they are backed by a real asset and regulated by government agencies.