One type of crypto that has been getting a lot of attention lately is the utility token. As more and more cryptocurrencies are entering the market, people realize that hype will only keep boost a value of a token for a short term. What keeps the value high is wether the token has utility or not.
What is a Utility Token?
Utility tokens are digital assets that provide users with access to a product or service. In many cases, they are used to raise funds for a project or company.
They can be used for a variety of purposes, from providing access to an online platform to entitling holders to a share of profits. The most important thing to remember about utility tokens is that their value is derived from their use case. If a utility token doesn’t have a use case, it probably won’t be worth very much.
Utility tokens are often compared to security tokens, which are another type of digital asset. Security tokens represent ownership of an asset, such as a company or a piece of real estate. Unlike utility tokens, security tokens are subject to government regulation.
Utility tokens vs. Security tokens
While utility tokens are not currently classified as securities, it is possible that they will be in the future. Even though these tokens are not intended to represent an investment in the same way that security tokens are, that is not what regulators are concerned with. The Howey Test is used by the SEC to determine whether or not an investment is a security.
Howey Test criteria:
• A financial investment
• People invest because they expect to profit.
• The investment is a “common enterprise,” which means that investors will only profit based on what the investment’s issuers do.
• Profits are contingent on the efforts of a third party.
If the investment meets the criteria above, the SEC considers it a security. It’s not difficult to argue that they apply to the vast majority of tokens and cryptocurrencies.
Utility Token Examples
A utility token has been used in a number of crypto projects. Here are a few examples of popular utility tokens. The majority of these tokens operate on the Ethereum network.
Basic Attention Token (BAT)
The BAT token is compatible with the Brave browser, which is intended to be secure and private. The Basic Attention Token enables a new advertising revenue model that eliminates the need for continuous tracking of user behavior. By opting in to view advertisements, Brave users can earn BAT. After that, BAT can be used to tip content creators on their websites or on Twitter.
Chainlink (LINK)
Chainlink (LINK) is a type of “oracle.” Oracles collect data from outside sources and upload it to the blockchain. This can help smart contract applications that require real-time price data.
0x (ZRX)
0x aspires to build a safe and fast crypto trading platform that combines elements of both centralized and decentralized exchanges.
Binance Coin (BNB)
Binance Coin (BNB) is an “exchange token,” or a token that is native to the ecosystem of a specific crypto exchange. Binance users who hold BNB on the platform receive a 25% discount on trading fees. Instead of taking fees in the form of fiat or the cryptocurrency being traded, fees are deducted from the trader’s BNB balance.
Challenges in using Utility Tokens
Aside from regulatory issues, the use of utility tokens poses technological and market challenges.
Transaction fees are one technical challenge. Because many utility tokens are ERC-20 tokens that run on the Ethereum blockchain, Ether gas fees can sometimes be prohibitively expensive. As more people compete for space in the next block, gas prices rise, making any transaction on the Ethereum network more expensive for everyone.
Another potential challenge with utility tokens is that, because they are often used to fund projects that are still in development, their value is highly dependent on the success of the project. If the project fails to meet its milestones or otherwise runs into trouble, the value of the token could plummet.
Of course, these are just some of the challenges associated with utility tokens. Regulatory uncertainties and the relatively young age of the market mean that there are sure to be other challenges that arise in the future. Utility tokens remain a popular way to raise funds for blockchain projects, but investors should be aware of the risks before they put their money into any token.
Final thoughts
If you’re thinking about investing in a utility token, make sure to do your research first. Utility tokens are a relatively new and unregulated asset class, so it’s important to be aware of the risks involved. That being said, utility tokens have the potential to provide investors with substantial rewards if they pick the right project.