What are utility tokens? Why do they exist?

Are utility tokens a new buzzword from the crypto space or does it have some significance? Let’s find out the reality!

There are different types of tokens in the crypto space with different functions. In other words, utility tokens are one of the popular types of cryptographic tokens.

Initial Coin Offerings (ICOs) gained huge popularity in 2017, raising over $4 billion . Since then, utility tokens have become a hot topic among members of the cryptocurrency community.

Let’s start with the basics. Stay with me!

What is a utility token?

Utility tokens are cryptographic tokens that allow users to perform certain activities within a project’s ecosystem. This token can be used to access your project’s services or products.

Utility tokens do not provide ownership to the holder. However, you can use these tokens to trade with other cryptocurrencies or buy NFTs.

These tokens can be purchased from cryptocurrency exchanges like any other token. Additionally, the price of these tokens will vary depending on the project’s market demand and its use case.

There are various types of utility tokens. This includes:

• Reward tokens: These tokens are received as rewards for participating in the crypto platform. For example, you can review products and earn rewards in your cryptocurrency wallet.
• Discount Tokens: These tokens allow you to avail discounts on supported crypto platforms. Here, we can help utility crypto holders avail discounts on usage fees for our services.
• Access tokens: These tokens allow users to gain special access to services available on the platform. For example, gaming platforms offer such tokens to unlock new levels.
• Subscription Tokens: Subscription tokens allow you to enjoy the benefits of premium services. In this case, you will receive benefits such as premium membership and early access.
• Exchange tokens: These tokens offer benefits such as early access to token sales and discounted transaction fees. For example, some exchanges offer discounts on transaction fees for payments in native tokens.

Now let’s take a look at the uses of utility tokens in the crypto space. stay tuned!

Uses of utility tokens

The main uses of utility tokens are:

#1. Decentralized finance (DeFi)

Utility tokens allow users to participate in various financial transactions through DeFi platforms. For example, you can use utility tokens to buy Bitcoin (BTC) on platforms like Uniswap and PancakeSwap.

Additionally, you can hold utility tokens as collateral and borrow fiat currencies or other crypto tokens. Additionally, you can also rent out your tokens to generate passive income.

#2. crypto games

Crypto games rely on utility tokens to power their ecosystems. For example, the GameFi market segment incorporates gaming, blockchain technology, and finance.

Tokens can be used to purchase in-game assets such as NFTs, characters, and collectibles. Similarly, game rewards also come in the form of tokens.

#3. crypto e-commerce

For crypto e-commerce, tokens can be used to buy and sell products and services. Additionally, the online platform uses live crypto market prices for smooth trading.

Additionally, you will receive compensation in the form of tokens for reviews, engagement, and purchases. Brands and businesses also offer referral rewards to expand their customer base.

#4. Content production

In the world of content, creators and consumers alike can benefit from utility tokens. If you are a creator, you can earn rewards in crypto tokens. Consumers can also access the content for free.

Additionally, there are no tech giants like Meta or Google between creators and viewers. As a result, creators tend to receive a larger share of the revenue.

#5. Participating in the Metaverse

The Metaverse is a hot topic in the cryptocurrency space, and utility tokens allow you to participate in various virtual events. Some platforms charge participation fees in the form of tokens.

Additionally, you can also purchase your favorite avatars and wearables by paying the price in tokens. For example, you can access the Decentraland platform and use the utility token MANA to purchase custom avatars and virtual assets.

Utility tokens and security tokens

Utility and security tokens often cause confusion among new investors. Let’s understand based on some key aspects.

#1. the purpose

Utility tokens do not provide ownership. These token holders will only have access to the platform’s functionality.

In contrast, security tokens provide legal ownership of a user’s assets. For this reason, these tokens are considered investments.

#2. rules

Utility tokens are issued through ICOs and are unregulated. Projects can issue these tokens without following government regulations.

However, security tokens are highly regulated by the Exchange Commission and U.S. Securities. Therefore, projects must go through all government procedures to issue security tokens.

#3. Ease of implementation

Utility tokens allow founders to raise funds more quickly. For this reason, most projects issue utility tokens through ICOs.

In contrast, security tokens are issued after lengthy government verification. As a result, it takes longer for these tokens to be issued to users.

Importance of utility tokens in ICO

Initial Coin Offerings (ICOs) are where crypto projects raise funds from retail and institutional investors. In return for their investment, they receive as many utility tokens as their project.

The amount raised through an ICO determines the total value of that particular crypto project. In addition, the founders will use the funds to promote the development and marketing of the project.

Practical use cases for utility tokens play an important role in attracting people to invest in ICOs. Additionally, tokens with high demand tend to yield higher returns during listing.

Let’s take a look at the Binance Coin (BNB) ICO as an example. Stay with me!

Binance’s 2017 ICO sold 100 million BNB tokens to the public for just $0.15. Binance raised a total of $15 million in ICO funds.

11 days after its successful ICO, Binance launched its cryptocurrency exchange. In addition, 35% of the funds raised will be spent on upgrading the exchange and platform systems.

Additionally, Binance used half of the ICO funds for marketing, branding, and educational purposes. Finally, the remaining 15% was set aside as an emergency fund to deal with unforeseen circumstances.

As of this writing, BNB’s market capitalization is over $33 billion. Binance’s ICO success story is the best example of how the demand for utility tokens will impact the future of ICOs and projects.

How to identify utility tokens?

The Howey test is commonly used to determine whether an investment is a security. Therefore, utility tokens cannot pass this test.

The Howey test in the crypto space consists of four elements.

1. Investing money: This involves people buying crypto tokens in exchange for a specific value of fiat currency.
2. Expectation of profit: This means you are purchasing the token with the expectation of generating future profits.
3. Common Enterprise: If a large number of investors are funding a crypto project, it is considered a common enterprise.
4. Benefit from the efforts of others: Here, the success of a crypto project primarily depends on the expertise and management of the developers and promoters.

If a token meets all of these conditions, it is considered a security token. On the other hand, tokens that do not meet the requirements fall under utility tokens.

Common examples of utility tokens

#1. Basic Attention Token (BAT)

Basic Attendant Token (BAT) is an ERC-20 utility token for the Brave browser. Additionally, this browser rewards users for consuming various advertisements.

Additionally, ad publishers also receive compensation based on user attention. Here, users and publishers receive rewards by using BAT tokens directly in their cryptocurrency wallets.

You can choose how often ads you want to see per hour. You can choose between 0 and 10 ads per hour as per your convenience. Finally, the concept of rewards is simple. The more ads you see, the more BAT tokens you will receive.

#2. Polygon (MATIC)

MATIC is a utility token in the Polygon ecosystem. The project operates with the help of the Ethereum blockchain to connect, develop, and extend various crypto projects.

MATIC tokens can be used to pay transaction fees on the Polygon network. Additionally, you can also stake these tokens to generate staking rewards.

The MATIC token has grown in popularity in recent years, powering over 19,000 DApps. Furthermore, this token has a market capitalization of over $5 billion.

#3. Binance Coin (BNB)

BNB, launched in 2017, is the utility token of Binance, the world’s largest cryptocurrency exchange. Furthermore, the price of this token rose from $0.15 during the ICO to an all-time high of $690 in 2021.

Initial use cases for the BNB token were limited to deducting transaction fees. However, you can now use this utility token to buy virtual gifts and book travel tickets.

Additionally, you can also use these tokens to stake and earn rewards. You can also borrow crypto assets by staking BNB tokens.

#4. Ripple (XRP)

Ripple’s native token, XRP , allows you to transfer cryptocurrency funds with low fees. Additionally, this feature allows you to perform transactions instantly using your wallet address.

Additionally, this token allows users to support their favorite creators by monetizing their content. All you need is Ripples’ public blockchain, the XRP Ledger.

Additionally, gamers can experience high-speed gaming with low fees and reliable throughput. You will also receive crypto rewards as XRP tokens from supported platforms.

final thoughts

Utility tokens are risky if you expect to profit from them. However, these tokens with real-world use cases can help you use different crypto platforms.

At the end of the day, think of utility tokens as a medium for participating in crypto-based activities. At the end of the day, avoid chasing fancy investment advice regarding crypto tokens.

Next, check out our article on Security Token Offerings (STO).