Is utility tokens yet another buzzword from the crypto space, or does it have any significance? Let’s find out the reality!
The crypto space is filled with various kinds of tokens with different functionalities. Namely, utility tokens are one of the popular types of crypto tokens.
Initial coin offering (ICO) gained massive popularity in 2017, attracting funds worth over $4 billion. Since then, utility tokens have been a hot topic among crypto community members.
First, let’s begin with the basics. Stay along!
What is a Utility Token?
A utility token is a crypto token that allows users to perform specific activities within the project’s ecosystem. You can use this token to access a project’s services or products.
Utility tokens don’t provide any ownership rights to their holders. However, you can use these tokens to trade with other cryptocurrencies or to buy NFTs.
You can buy these tokens from crypto exchange just like any other token. In addition, the price of these tokens varies based on the market demand of the project and its use case.
There are different types of Utility tokens. It includes:
Reward Tokens: You will receive these tokens as a reward for your participation in a crypto platform. For instance, you can review a product and earn rewards in your crypto wallet.
Discount Tokens: These tokens allow you to avail discounts on supported crypto platforms. Here, utility crypto holders can help you avail reductions on using a service.
Access Tokens: These tokens allow its users to attain special access to the services available on the platform. For example, gaming platforms provide such tokens to unlock new levels.
Subscription Tokens: You can use subscription tokens to enjoy the benefits of premium services. In this case, you’ll receive perks like premium membership, early access, and many more.
Exchange Tokens: These tokens offer benefits like early access to token sales and discounts for trading fees. For example, some exchanges offer reductions in transaction fees for payments in their native tokens.
Now, let’s check the applications of utility tokens in the crypto space. Stay tuned!
Applications of Utility Tokens
The major applications of utility tokens include:
#1. Decentralized Finance (DeFi)
Utility tokens allow users to participate in various financial transactions through DeFi platforms. For example, you can buy Bitcoin (BTC) using your utility token on platforms like Uniswap or PancakeSwap.
In addition, you can keep your utility tokens as collateral and borrow fiat or other crypto tokens. Moreover, you can lend your tokens to generate passive income.
#2. Crypto Gaming
Crypto gaming relies on utility tokens to empower its ecosystem. For instance, a GameFi market segment incorporates gaming, blockchain technology, and finance.
You can use tokens to purchase in-game assets like NFTs, characters, or collectibles. Likewise, you’ll also get gaming rewards in the form of tokens.
#3. Crypto E-commerce
In the case of crypto E-commerce, you can buy and sell your products or services using tokens. Moreover, the online platforms use live crypto market prices for smooth transactions.
In addition, you will receive rewards as tokens for your reviews, engagement, and purchase. Also, brands and companies offer referral rewards to expand their customer base.
#4. Content Creation
In the world of content, creators, and consumers can equally benefit from utility tokens. If you are a creator, you can earn rewards in crypto tokens. Also, as a consumer, you can access the content for free.
Moreover, no tech giants like Meta or Google exist between creators and viewers. As a result, the creators tend to receive a larger portion of their revenue.
#5. Metaverse Participation
Metaverse is a hot topic in the crypto space, and utility tokens allow you to attend various virtual events. Some platforms charge entry fees in the form of tokens.
In addition, you can buy your favorite avatars or wearables by paying their price in tokens. For example, you can visit the Decentraland platform to buy custom avatars or virtual assets with their utility token, MANA.
Utility Tokens vs. Security Tokens
Utility and security tokens often create confusion among new investors. Let’s understand based on some major aspects:
Utility tokens don’t provide any ownership rights. These token holders can only access the features of the platform.
In contrast, security tokens provide legal ownership for the user’s asset. For this reason, these tokens are considered as an investment.
Utility tokens are issued through ICOs and are not regulated. Projects can issue these tokens without following any government regulations.
However, security tokens are strictly regulated by the Exchange Commission and U.S. Securities. As a result, a project needs to pass all government procedures to issue security tokens.
#3. Ease of Implementation
Utility tokens allow founders to raise funds in a shorter time. For this reason, most projects issue utility tokens through ICOs.
In contrast, a security token is issued after lengthy government verifications. As a result, these tokens take time to get issued to the users.
Importance of Utility Tokens in ICOs
An Initial Coin Offering (ICO) is where crypto projects raise funds from individual and institutional investors. In return for their investment, they receive an equivalent number of utility tokens for that project.
The amount raised through ICOs determines the total worth of that particular crypto project. Moreover, the founders use the funds to fuel the development and marketing of their project.
The practical use-case of utility tokens plays a crucial role in attracting people to invest in ICOs. In addition, the high-demand tokens tend to provide higher returns during their listing.
Let’s take the ICO of Binance Coin (BNB) as an Example. Stay along!
During Binance’s ICO in 2017, 100 million BNB tokens were sold to the public for just $0.15. Altogether, Binance raised a whopping $15 million from the ICO.
After 11 days of their successful ICO, Binance launched their crypto exchange. Moreover, they spend 35% of the raised funds to upgrade their exchange and platform system.
In addition, Binance used half of the ICO fund for marketing, branding, and educational purposes. Finally, they set aside the remaining 15% as an emergency fund to deal with unpredictable situations.
At the time of writing, BNB has a market cap of over $33 billion. Binance’s ICO success story is the best example of how the demand for utility tokens can impact the ICOs and the project’s future.
How to Identify a Utility Token?
The Howey Test is commonly used to determine whether an investment is a security. For this reason, utility tokens fail to pass this test.
Howey Test in the crypto space consists of four elements:
Investment of Money: This involves people purchasing crypto tokens in exchange for fiat currencies of a certain value.
Profit Expectation: This means that you’re buying a token expecting to generate profit in the future.
Common Enterprise: If a large number of investors are funding a crypto project, then it’s regarded as a common enterprise.
Profit From Others Effort: Here, the success of a crypto project depends mostly on the expertise and management of developers and promoters.
If a token meets all these conditions, it can be considered a security token. On the other hand, tokens that fail to meet the requirements fall under utility tokens.
Popular Examples of Utility Tokens
#1. Basic Attention Token (BAT)
Basic Attention Token (BAT) is an ERC-20 utility token of the Brave browser. Moreover, this browser rewards its users for consuming various advertisements.
In addition, publishers of advertisements are also rewarded based on the user’s attention. Here, users and publishers are rewarded using BAT tokens directly on their crypto wallets.
You can choose the frequency of ads you intend to see per hour. You can select 0 to 10 ads per hour at your convenience. Finally, the reward concept is simple: the more ads you see, the more BAT tokens you’ll receive.
#2. Polygon (MATIC)
MATIC is the utility token of the Polygon ecosystem. This project operates with the help of the Ethereum blockchain to connect, develop, and scale various crypto projects.
You can use MATIC tokens to pay the transaction fees on the Polygon network. In addition, you can also stake these tokens to generate staking rewards.
MATIC tokens have gained popularity in recent years and power over 19,000 DApps. Moreover, this token has a market cap of over $5 billion.
#3. Binance Coin (BNB)
Issued in 2017, BNB is the utility token of the world’s largest crypto exchange, Binance. Moreover, the price of this token increased from $0.15 during ICO to an all-time high price of $690 in 2021.
The initial use case of BNB tokens was limited to trading fee deduction. However, now you can use this utility token to buy virtual gifts, book travel tickets, and more.
In addition, you can use these tokens to stake and earn rewards. Also, you can borrow crypto assets by staking BNB tokens.
#4. Ripple (XRP)
Ripple’s native token, XRP, allows you to transfer crypto funds at low fees. Besides, you can use this feature to conduct transactions instantly with the help of a wallet address.
Moreover, this token allows users to support their favorite creators by monetizing their content. To do so, all you need is XRP Ledger, Ripples’s public blockchain.
In addition, gamers can experience high-speed gaming for low fees and reliable throughput. Also, they’ll receive crypto rewards as XRP tokens from supported platforms.
Utility tokens are risky if you expect to profit from them. However, these tokens with actual use cases can be helpful while using various crypto platforms.
After all, consider utility tokens as a medium to participate in crypto-based activities. Ultimately, avoid chasing flashy investment advice on crypto tokens.
Abhijith is a crypto and blockchain writer with a bachelor’s in electronics engineering. He loves to write crypto articles to educate and create awareness among his readers in an engaging way. Besides writing, he is interested in technical… read more
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