In GameFi, you often hear utility tokens and governance tokens thrown around a lot. What do they mean and what’s the difference?
Most new players in blockchain gaming often find themselves wondering, “Why do they have to make things so complicated?”. A common misconception certain transitioning gamers think when they first come to NFT gaming is that game economies should be simple.
You should be able to just play a game, earn a token, and sell that token for fiat. Sounds simple, right? However, that model is a recipe for disaster. If every player does that, the game’s token goes to zero, the game dies, and a puppy somewhere in your neighborhood goes without food for one cold evening.
As such, GameFi games have had to come up with complicated tokenomics structures to survive. That means some games have two (and even three!) tokens.
- Utility tokens?
- Governance tokens?
- Bonus tokens?
“We don’t care we just want to play!”
Take it easy. This stuff might seem complicated at first, but it’s all pretty straightforward when you break it down. That’s why we are going to look into the difference in this article.
Coin vs. Token
What Is a Coin?
In the crypto space, coins refer to the native currency of a blockchain. For example, Ether, SOL, and Bitcoin are coins. Think of these as the primary currencies in crypto. You usually need to buy one of these native coins on a crypto exchange to get started in GameFi.
What Is a Token?
Tokens are everything else:
- A game’s utility token
- A governance token
- NFTs
- All other altcoins
Think of tokens like secondary currencies in the crypto space. You usually need to trade a blockchain’s native coin for a game’s utility token on a DEX to get started in GameFi.
What is ERC?
Taking a deeper dive into tokens, ERC is basically ERC standards. You’ve probably seen this acronym in whitepapers or on Twitter. Usually accompanied by a number like:
- ERC-20
- ERC-721
- ERC-1155
These might look complicated, but don’t let the cryptic number and letter combination fool you. ERC standards are easy to understand if you think about it in terms of games.
ERC-20 tokens are known as fungible tokens. That’s a fancy phrase that just means each one is equal to another of the same type.
For example, every $MANA in Decentraland is worth the same as every other $MANA.
Contrast that with ERC-721 Tokens which are non-fungible tokens. They are better known as NFTs. For example, Bored Apes are ERC-721 tokens. Therefore, not every Bored Ape NFT is worth the same as each others.
Utility vs. Governance: The Ultimate Battle
Utility Tokens—In general, utility tokens in GameFi have some in-game use and an externally tradeable value. That means you usually get rewarded the utility token for actions you take in the game, and you can either use it to buy some useful in-game item or sell it in a marketplace.
Governance Tokens—These often grant you voting rights and allow you to take part in the decision-making process of a game. Sometimes they have the prefix “ve”, which stands for Vote Escrowed. In simple terms, this just means the longer you stake this governance token, the more rewards or voting weight you have.
(In case you’re wondering, both utility tokens and governance tokens are ERC-20 tokens.)
How Utility and Governance Tokens Work in GameFi
Most P2E games give you its utility token for accomplishing quests and tasks in-game. Using the token you earned, you can sell that on the open market for fiat or you could use it to buy an upgraded weapon or item.
However, the introduction of governance tokens increases the options you can do with your rewards. You can stake your utility token to earn your governance token. Governance tokens give you the power to vote on any game changes in the future, giving you a slice of the power to dictate where the game is heading for the future.
Final Thoughts
Don’t let the acronyms fool you. ERC standards are easy to understand and tokens can be learned through interacting with the game. The better your handle on in-game token types, the more likely you are to check out lucrative gaming opportunities in the future.
Edmond is a passionate writer for Video games, GameFi and Web3. He has worked for top GameFi companies and video game/crypto news websites.
