A Security Token: What Is It?
In contrast to coins, utility tokens are typically pre-mined and created all at once by the network’s developer. They are typically given away to investors during the initial coin offering (ICO) phase in order to spark interest in the good or service. They are created to serve a specific purpose within a platform’s ecosystem. Tokens don’t have any real monetary value, even though investors may be able to buy and use them as a form of payment on the network to redeem or gain access to a specific service. They are not meant for investment, in contrast to the coins of the network.
Nevertheless, given a limited supply of tokens, it is possible for a utility token’s value to rise in tandem with demand. A token’s value may increase in line with the network’s scalability if it is connected to a decentralized application (DApp).
The Function of Utility Tokens
Security tokens and utility tokens are two different things. The latter consists of company ownership rights, similar to a decentralized version of digital shares used for investments. In contrast, utility tokens can only be used within the company’s particular blockchain ecosystem to access its goods and services.
You can only exchange tokens or carry out actions on a specific decentralized exchange (DEX) if you have a token for that DEX. These DEX tokens may be distributed as a benefit to platform users or as an interest to those who lend money to platform-based borrowers. For instance, the Basic Attention Token (BAT) from Brave is a utility token that can only be issued via the Brave browser or through programs that have a built-in BAT wallet, like Twitter. In general, utility tokens are only useful within the network for which they were designed.
Utility tokens are frequently used to raise money for startups through initial coin offerings (ICOs), as they can be sold in exchange for other digital assets, as a result of the global expansion of blockchain networks. One of the most popular utility token standards is ERC-20, especially among companies that create DApps for the Ethereum blockchain (since they will eventually go through an ICO phase using these tokens).
Tokens can also be used as rewards to promote a particular behavior within the ecosystem. For instance, tokens could be given to users who provide data on their consumption in order to enhance and perfect the current blockchain technology. Despite the utility of these network-specific tokens, which made them popular during ICOs in 2017–18, their lack of regulation also contributed to fraudulent cases: many cryptocurrency projects failed to fulfill their unrealistic promises of high returns for investors.
Illustrations of Utility Tokens
Tokens have been used by many cryptocurrency projects in one form or another, whether to raise money or promote specific platform transactions. Even a non-fungible token (NFT), for instance, could be used as a utility token to speed up transactions on the Ethereum network.
Here are a few more instances of well-known utility tokens being used on various networks.
Arweave (AR) Arweave uses the AR token to reward miners for their assistance in storing the vast amount of network data because it is a decentralized storage network that permits indefinite data storage.
Basic Attention Token (BAT)
Both content producers and users who choose to view advertisements are rewarded with BAT. This enables the platform to monetize through advertising without having to monitor user behavior. Typically, BAT is distributed privately and securely via Twitter or the Brave browser.
Binance Coin
The Binance network’s native currency, BNB, is both a coin and a token. When users trade with BNB, they can get a 25% discount on trading fees.
Chainlink (LINK)
Different blockchains can incorporate Chainlink, an oracle that gives real-time data to blockchains from an outside source. It rewards users who provide accurate, up-to-date data to feed into various blockchains with ERC-20 tokens (LINK). To track pricing information, this is particularly beneficial for smart contract applications.
Zilliqa (ZIL)
The native token ZIL is used on the Zilliqa platform to make it possible for developers to create secure and cost-effective DApps, whether they are for NFT marketplaces or financial services. ZIL can also be used for online gaming and advertising transactions.
