What is a Utility Token?
Blockchain technology has the potential of causing disruptions in almost all industries. Digital currencies or tokens are most well-known use of blockchain, contributing to its success. Tokens are built on an existing blockchain to enable the creation and execution of unique smart contracts that represent the ownership of assets outside of blockchain network, thereby having the potential to deliver the ownership of fungible and non-fungible units of value such works of art, coins, digital assets and more. a special type of token that is issued in order to fund development of the cryptocurrency is utility token. It can be later used for purchasing a good or service provided by the issuer of the cryptocurrency. Moreover, utility tokens can be employed as a new way of fundraising for the mass wave of blockchain start-ups which have been emerging in the recent years. They have the opportunity to raise funds without comprising their independence.
Utility token
Utility tokens are based on a specific protocol existing on the blockchain. They are used to enable future access to products and services which have been built on the blockchain technology of the protocol. In fact, they are highly useful when a company wants to create a coupon that can be exchanged for access to its services in the future.
Utility token is different from security token which is created for direct investment. it is mainly created for payment within a particular blockchain ecosystem. There is a reciprocal relationship between the utility tokens and platforms on which they are integrated. The platform provides security for utility tokens while these tokens allow the network activity which is necessary for strengthening the platform’s economy.
It is usually beneficial to buy utility tokens during the ICO sale. A large number of investors are interested in buying in ICO because during this public sale, tokens are offered at a significantly cut-rate price.
How do utility tokens work?
Fundraising can be the main reason behind utility token, but it is not their sole purpose.
They also:
- Give holders voting power when crucial decisions need to be made
This is mainly used on blockchains with a proof of stake model. Once users have a stake in their network, they are given the chance to vote on its well-being.
- Grow a thriving economy within the blockchain network
Sometimes companies pay its users to double-check identities and make attestations within their blockchain system.
- signify a financial asset
These tokens can also be used to represent another financial asset including tangible money and properties.
- allow the trade of digital goods
Blockchain-powered games enable their players to claim genuine ownership over their purchased online assets.
These utility tokens can be bought in different cryptocurrencies and even sometimes with fiat currencies. The person who wants to play a part in the project pays a certain amount of money for specified number of tokens. Then, ownership of the tokens is granted to them. The allocation of bought tokens is directed to an address under the control of the buyer. As a result, owning this token, the buyer can access the services in the future.
In short, the purchase of utility tokens of a successful project can lead to earning great profits during ICO for the buyer because of getting tokens at a much lower price.
