There are different types of crypto coins and tokens. These coins and tokens all have their own properties. The best-known tokens are the security tokens and utility tokens. In this article we explain what a utility token is. Of course we do this on the basis of several examples, to make it as simple as possible.
The difference between a crypto coin and a token
It is important to understand the difference between cryptocurrencies and tokens before understanding what a utility token is. Many people think that there is no difference between cryptocurrencies and tokens. However, that is not the case. There is a big difference between cryptocurrencies and tokens. The difference between types of tokens, on the other hand, is a lot harder to understand.
A cryptocoin is a means of payment that you can sell, buy or trade. There is basically nothing behind the crypto coin. It is a piece of code, whose value is based on supply and demand. You can pay with a cryptocurrency. This way you can send the cryptocurrency to different people when you want to purchase a product or service. It is also possible to keep the cryptocurrency in your wallet until it has increased in value. For the rest, a crypto coin has few to no functions. In any case, no functions that go beyond use as a means of payment. This is the main difference between a crypto coin and a token.
Tokens, on the other hand, have a much broader function. A token can represent a certain value. A value that is actually based on something. For example, the value of a token can be based on a physical product. It is possible to tokenize assets. Then the value of assets is converted into tokens. A token then represents a certain value of the asset.
But a token can also be based on voting rights. In Delegated Proof of Stake and Proof of Vote, tokens are used as voting rights. Blockchain participants can then vote with their token for a node they believe is suitable to process and validate transactions.
When it comes to voting rights or tokenizing assets, we talk about security tokens . Later in this article we explain the difference between utility tokens and security tokens.
What is a Utility Token?
We can think of a utility token as a kind of exchange medium that contains certain functionalities that distinguish it from other tokens. A utility token can be used as a product or service. It is actually a kind of voucher. Someone pays for something in advance, and can then use their utility token to use a product or service.
Utility tokens can also be used for crowdfunding. We call this in the crypto world an Initial Coin Offering, better known as ICO . Here people can invest in a new crypto project, which requires money. Investors can buy utility tokens. The money is then used to get the project off the ground.
It is possible to buy or sell utility tokens on crypto exchanges. That is the same as with crypto coins. The price of utility token is also determined by the supply and demand for the token.
Utility token example
Let’s make it all a bit easier by using an example. You will then have a much better understanding of what a utility token is, how it works and what it can be used for.
Suppose a company called XYZ wants to get a new blockchain off the ground. This blockchain should ensure that insurance policies can be stored on the blockchain from now on. So very progressive. But to develop this blockchain, money is needed. The company starts a crowdfunding by starting an ICO.
Company XYZ will then do everything it can to find investors. These investors can buy a utility token for 5 euros each. When the project succeeds, investors will be able to exchange the tokens for cryptocurrencies that will run on the blockchain. When someone has enough confidence in the success of the project, they can decide to purchase a utility token. When you purchase 100 utility tokens, you pay 500 euros for this. When all tokens have been sold, or the end time has passed, the company can start the project. Meanwhile, the utility tokens can already be traded on crypto exchanges. When there is a lot of demand for the tokens, it is possible that people are already selling the tokens for 10 euros each. So you can already make a profit with these tokens.
Once the blockchain is ready and the cryptocurrency is for sale, owners of the utility tokens can exchange their tokens for cryptocurrencies that are from the same blockchain. So the utility tokens have all along represented a product: the blockchain cryptocurrency that has just been developed.
The difference between utility tokens and security tokens
The main difference between utility tokens and security tokens is that security tokens represent securities. This can be, for example, shares or bonds. But also assets. We mentioned earlier that assets can be tokenized. The value of the asset is then converted into tokens, after which they can be sold. Owners of security tokens can sell these tokens, after which the owner of the token is entitled to the value of the token.
Security tokens are regulated in the Netherlands by a national regulator. This supervisor is called the AFM.
A utility token, on the other hand, does not contain a fixed, official value. It is not possible to convert assets into a utility token. A utility token can only represent one product or service. For example, a cryptocurrency.
The similarity between these two tokens means that many people are not quite aware of the difference between these two tokens. The similarities are very close to each other. On the other hand, it is a lot easier to understand the difference between cryptocurrencies and tokens.
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com