WHAT IS A UTILITY TOKEN?
Utility tokens are one of the types of cryptographic tokens. They are tokens that give their holders access to a blockchain-based product or service. It is helpful to think of utility tokens as vouchers or coupons. The asset they represent is a certain level of access to a service or product that the holder can obtain by redeeming it.
For example, Ether can be exchanged for access to decentralized applications (dApps) or to pay for smart contracts to be executed on the Ethereum blockchain. Similarly, Gas coins allow you to access the NEO network.
Some utility tokens also function like reward points. Users of the Brave browser, for example, can earn BATs (Basic Attention Tokens) by viewing targeted ads. These BATs can be exchanged for premium services on the Brave network.
Also, utility tokens are frequently used in initial offerings. In exchange for assisting to fund blockchain-based projects, investors get special access to products or services. Because utility tokens do not fit the traditional definition of an investment, they are largely unregulated. As a result, fraudsters and scammers can take advantage of them.
SOME FACTS ABOUT UTILITY TOKENS
Below are some facts you need to know about utility tokens.
- Utility tokens are the most common type of cryptographic token, owing to the fact that the majority of the initial offerings that took place during the 2017 initial offering boom used utility tokens.
- By far the most well-known standard for creating utility tokens is ERC-20, which lives on the Ethereum network. There were 829 projects based on it as of December 2020.
- Because utility tokens provide access to a product or service, their value is linked to the popularity of that product or service.
- If more people request to use the product or service, the demand for the utility tokens that allow them access to that product or service rises. As a result, the utility token becomes more valuable. In the same way, if users’ interest in the product or service dwindles, the value of the utility token decreases as well.
DIFFERENCE BETWEEN A UTILITY TOKEN AND A SECURITY TOKEN
The purpose of token creation can be used to tell the difference between a utility token and a security token. Utility tokens are created to assist fund ICOs and build an internal economy within the project’s blockchain, whereas security tokens are created as investments.
A security token’s value is directly linked to the value of the company that issues it. The greater the value of the company, the greater the value of the security token. On the other hand, the value of a utility token is not directly related to the value of the company that issues it.
Unlike security tokens, utility tokens are largely unregulated. Although utility tokens may be exempted from the federal laws that govern securities, they are more likely to be exploited by scammers.
Token offerings are more tightly regulated these days, making the distinction between a utility and a security token easier to make. Although regulations may differ between jurisdictions, it all comes down to whether or not the token is meant to be used as an investment with the expectation of returns. This test is known as the Howey Test in the U.S., while many other financial regulators across Asia and Europe use comparative tests.
WHY ARE UTILITY TOKENS IMPORTANT?
Apart from being used to raise funds, utility tokens can also be used to create unique incentive schemes that enable people to perform certain actions within an ecosystem knowing they will be compensated for it.
Our economic system is not set up to incentivize people to deal with many of the challenges we have today. For example, most people would agree that people should be responsible for using cleaner energy sources and cleaning up the environment. However, because there is no clear business model in place for such an initiative under our current system, any company that sets out to clean the environment will almost certainly have to operate as a non-profit.
Thankfully, a utility token like LITH Token is changing this narrative. LITH utilizes blockchain technology to create an environment where all users within an ecosystem are incentivized to work together towards a cleaner future through decentralization and accountability in business.
TO WRAP UP
Utility tokens are relevant due to their many different, power use cases. These use cases make them useful and valuable. Utility tokens can allow seamless transactions over a blockchain, fund project developments, allow payments for decentralized services, etc.
According to Mougayar, utility tokens can play six unique roles (the right, the value exchange, the toll, the function, the currency, and the earnings). These six roles exceed the limited roles of a security token, which is mainly a medium for investment.
ABOUT $LITH TOKEN
LITH is a diverse team of experts with experience in various fields including energy, technology, business, finance and law. Our goal is to create opportunities for individuals and businesses that have the potential to scale on an international level while remaining socially and environmentally conscious. As more countries across the globe are adopting environmental social governance models (ESG), LITH merchants will be able to access one global decentralized network which will provide them with new possibilities – A market of endless opportunity stretching before us everyday as we grow together!