Utility Tokens are digital tokens created on a blockchain and meant to be used for a specific purpose within a network or platform. Unlike security tokens, which represent an investment and are subject to strict regulatory scrutiny, utility tokens are designed to provide users with access to a product or service. ^[1][2]

Overview

A utility token is a type of digital asset that holds intrinsic value within a specific ecosystem or platform. Unlike cryptocurrencies designed primarily as a store of value or medium of exchange, utility tokens are created to provide users with access to a particular set of functionalities or services within a blockchain-based network. ^[1][2]

Utility tokens are issued through a process known as a token sale or token generation event (TGE). Utility tokens can also be used to reward users for completing tasks or providing services on the platform. ^[2]

It's important to note that utility tokens don't necessarily require an ICO. The IQ token is an example of a utility token that did not have an ICO.

Utility Token Life Cycle

The lifecycle of a utility token begins with the design and creation phase, involving the conceptualization of the token's purpose and technical specifications, typically outlined in a whitepaper. The project develops a smart contract on a blockchain platform (commonly Ethereum) to create and manage the utility tokens. The smart contract defines the rules of the token sale, such as token distribution, pricing, and any specific functionalities. ^[1]

The project announces the token sale, providing details such as the start and end dates, the amount of tokens for sale, accepted cryptocurrencies, and any discounts or bonuses for early contributors. Participants then contribute cryptocurrency to the project's wallet address in exchange for the utility tokens. The smart contract automatically distributes the corresponding amount of tokens to the contributor's wallet. ^[2]

Finally, the utility tokens are often listed on exchanges, entering secondary markets where they can be traded, thereby providing liquidity to token holders. ^[1]

Primary Functions of a Utility Token

Access to Services

Utility tokens are often utilized to access decentralized platforms, computing power, storage, and content. They can also compensate for network services and transaction processing. ^[1]

Governance

Some utility tokens provide holders with voting rights or decision-making capabilities within the governance structure of a decentralized network. ^[1]

Incentives and Rewards

Platforms often use utility tokens to reward users for specific actions, fostering engagement and participation within the ecosystem. It grants access to specific features or benefits. ^[1]

Examples of Utility Tokens

Basic Attention Token (BAT)

The Basic Attention Token is an Ethereum-based token (ERC-20) used to monetize user attention on the Brave browser. Users are rewarded with BAT tokens for viewing ads in the Brave browser. ^[2][3]

Chainlink (LINK)

Chainlink is a blockchain oracle that is built on the Ethereum network. An oracle is a service that connects a blockchain to external sources to input real-time data. LINK is an ERC-20 token and the utility token of the Chainlink Oracle network. LINK rewards network operators for retrieving data and various other services, making it the lifeblood of that application. ^[3]

0x (ZRX)

0x is an open-source protocol that enables the peer-to-peer exchange of Ethereum-based tokens and assets. It is designed to provide a decentralized exchange for ERC-20 compatible tokens. ^[2]

Augur (REP)

Augur is a decentralized prediction market platform that allows users to create predictions and wagers on the outcome of real-world events. The Augur token (REP) is used to reward market makers who accurately forecast the outcomes of events. ^[4]

Golem (GNT)

Golem is a decentralized supercomputer that allows users to rent out their computing power to others in need. The Golem token (GLM) is used to pay for services and resources on the platform. ^[2]

Utility Tokens & Security Tokens

Utility tokens and security tokens differ in their purpose, legal classification, and fundraising methods within the crypto space.

Utility tokens are designed to provide access to specific functionalities or services within a blockchain platform, with their value tied to usage. ^[3]

Utility tokens are not considered traditional investments. On the other hand, security tokens represent ownership in an asset or company and grant financial rights such as dividends or voting privileges. Subject to securities regulations, security tokens are raised through Security Token Offerings (STOs) and are viewed as traditional investments, with their value linked to the performance of the underlying asset or company. ^[3]

The key distinction lies in whether the token primarily serves a functional purpose or represents a financial interest, determining the applicable legal and regulatory framework. ^[3]