For anyone new to the crypto space, it is quite often to confront many new terms. Even for experienced players, it is necessary to have a basic knowledge of relevant terms. One such terminology is utility tokens. The term utility token is often confused with security token therefore, it is important that you know the difference between both of them.
To have a clear understanding is essential as both of these terms may be associated with thousands of dollars. The cryptocurrency market is itself very fearful and especially for a third person who is just in preliminary phases, it can be very overwhelming. Educating yourself about the basics greatly reduces the risk of losing all your wealth. It helps in making a correct analysis of the ongoing situation.
A token is an entity that is used for the representation of another entity. In general terms, a token may be used to represent a portion of an underlying asset, a utility, or a unit of a value issued by a business to their clients or customers. A utility token is simply a portion of an asset or access to rights that people buy to be used in the future. It is a representation of a programmable utility or value.
When a business or a company issues a utility token it means they are creating a digital coupon to give particular rights to its owner in the future. The access rights may be a discounted fee, special access to a product or a service. Utility tokens are often used during crowd sales. The crowd or public sale in the case of a utility token is referred to as the Initial Coin Offering. A utility token must also not be confused with a crypto coin, as a crypto coin is independent of a platform and is constant for a currency. On the other hand, a token is particular for a platform.
As mentioned earlier when a project launches a utility coin, it is, in turn, providing a side benefit to its owner. A project only releases a limited amount of tokens and they are released when there are high sales. The limited amount of tokens ensure that they have a value. The tokens you bought in the crowd sales can be redeemed to gain access to a product or a service of a company in the future. The functionality associated with a utility token is based on its usage in the future. It can do many different things and have vast applications.
Utility tokens are widely in use because they are powerful and hold value. The usage of a utility is structured on three pillars. These three pillars can be named as their role, their features, and their purpose. The roles of a utility token can be classified into a further six classes namely bestowing, exchanging, tolling, functioning, acting as a currency, and as a means of earning.
By bestowing, it means that the token is able to bestow its owner with certain excisable rights. These rights may include a right to own or use a product or a right to vote. Exchanging refers to providing an exchanging value for services provided. Tolling means allowing the users to enter the blockchain market and use decentralized services.
Functioning is a general usage that aims at providing the users with an easy working atmosphere by providing tokens for various services. The tokens may also be used as currency for payments inside or outside the crypto market to serve as an alternative to the traditional payment system. The utility tokens also enable their users to share or distribute the earnings of certain things.
The major difference between a utility token and a security token is in their functionality. Security tokens are used for investments. Security tokens derive their value from an externally tradeable asset. Whereas the usage of utility tokens depends only on three pillars, the functionality of a security coin is regulated by federal laws and regulations. If the owner of the token does not comply with the terms, they can face severe consequences.
The security tokens are a representation of earning streams, companies, or entitlement to interest payments. The concept of a security token can be considered similar to bonds, derivatives, or equities. On the other hand, utility coins entitle a user to gain certain rights that can be exercised in the future. Platforms such as the Security Coin Offerings are built to grab more investors in various projects and win their trust. The token holder may get extra coins whenever the issuing company earns the profit in the market. Whereas, there is no such binding in the utility tokens. A token is only called a security token if it passes the Howey test.
The users who take security tokens also gain ownership of the company. The blockchain provides a platform that can be used as a voting hub for all the security token holders. Through this, all the members participate in the decision-making process of the company. The Howey Test is used to screen various transactions for the ability to qualify as “investment contracts”. In contrast, the utility tokens do not impart such powers as to make decisions for a company.
Furthermore, utility tokens are not subjected to any regulations or federal laws in particular. Also, in the case of a security token, the value of the token depends upon the value of the company. In the case of the utility token, there is no relation between the value of the token and the current status of the company's worth.
So the basic difference between the two tokens is that the security token gives its user the right to exercise power whereas the utility coin gives its user some benefits that can be used in the future. Both these tokens are helpful in crypto trading and serve as a means of earning margins and profits. However, people should know the difference between each one of them, and should only opt for the most suitable tokens to avoid any future inconvenience.