Cryptocurrency is a general term used to describe all digital assets that are broadly categorized into two groups: coins and tokens. Coins are basically a form of cryptocurrency that functions to transfer monetary value between parties. Bitcoin (BTC) and Litecoin (LTC) are some good examples of coins. Tokens on the other hand are a different category of cryptocurrency, designed to be used for a particular purpose. Utility and security tokens are the major class of cryptocurrency tokens. Read on to learn about utility tokens in detail.
What is a Utility Token?
A utility token is a special type of digital asset that is mainly aimed at raising funds needed to develop a crypto project. They are usually associated with initial coin offerings (ICOs) where investors purchase utility tokens using fiat currencies or different cryptocurrencies in exchange for particular privileges in the project.
Utility tokens aren’t a form of investment since they are speculative and function more like promotional tools for an upcoming crypto startup. Besides, their prices are generally static during the initial stages with the market value fluctuating based on the demand for the project.
Once purchased, utility tokens can be stored in a supported crypto wallet held by the buyer. The tokens can be used to access particular services offered by the blockchain project during their earlier phases.
Utility Token Uses
A utility token can achieve any purpose a developer wants it to achieve. Usually, utility tokens provide access to a certain service or product within a blockchain ecosystem. In other terms, you may require a particular utility token to be able to perform certain actions on a blockchain network.
While utility tokens can be used to transfer value between parties, that’s generally not their primary purpose. The main use case of utility tokens in the crypto space is to facilitate the funding of crypto projects via ICOs. In an ICO, crypto project founders and developers announce the issuance of a particular amount of tokens. These tokens are majorly utility tokens having a value determined by the project based on the set target of funds necessary to fund its development.
While the utility token prices are generally static, they may fluctuate widely based on several factors, mostly demand. ICOs are usually carried out on smart contract platforms such as Ethereum since their setup allows for the creation of utility tokens and offers the technicalities required to successfully carry out an ICO.
An individual who is interested in a particular crypto project buys a certain amount of utility tokens using either crypto or fiat currency. They then can store the tokens in their crypto wallets so that they can be able to access certain services of the project once up and running. They can also sell the token in the future to generate considerable profits, especially if the project ends up being exceedingly successful.
Challenges with Utility Tokens
While utility tokens can be a great tool for raising funds to finance crypto projects under development, they have several challenges associated with their use. To begin with, utility tokens are accompanied by certain investment risks. For instance, some ICOs have turned out to be a scam where investors lose their hard-earned cash buying utility tokens linked to these scam projects. Some challenges associated with utility tokens include:
- Lack of a contented and precise mechanism for valuing crypto tokens.
- Loose of value in case a crypto project fails to take off or collapses.
- They do not offer investors governing rights in the project meaning that the projects’ founders and the core team can make decisions without the involvement of token holders(investors)
- They may have liquidity problems considering that utility tokens may fail to raise the needed capital required for the development of a particular project.
Examples of Utility Tokens in the Crypto Space
Numerous crypto projects fundraised using a utility token and most of which run on the Ethereum network. Here are common examples of utility tokens in the crypto space:
- Basic Attention Token(BAT)
- 0x (ZRX)
- Binance Coin (BNB)
- Zilliqa (ZIL)
- Aurora (AOA)