While the word “cryptocurrency” is often used as an umbrella term to describe all digital assets, there are actually several specific types of cryptos. Most of them fall into two main categories: coins and tokens.
Coins, or currencies, have one function: to transfer monetary value. Bitcoin (BTC) and Litecoin (LTC) are good examples of currencies.
Tokens, on the other hand, are a different class of cryptos entirely. Security tokens and utility tokens are the most common types.
Definition of Utility Token
A utility token is a crypto token that serves some use case within a specific ecosystem. These tokens allow users to perform some action on a certain network.
A utility token is unique to its ecosystem. Brave’s Basic Attention Token (BAT), for example, can only be used to tip content creators through the Brave browser or through other applications that have integrated BAT wallets, like Twitter. BAT has no other use beyond speculating on its value. The same can be said of any utility token.
Utility tokens are not mineable cryptocurrencies. They are usually pre-mined, being created all at once and distributed in a manner chosen by the team behind the project.
Utility Token vs Security Token
The main difference between a utility token and a security token is that security tokens give rights of ownership to a company. Think of them sort of like digital, decentralized shares of stock. Security tokens are also classified as securities by financial regulators like the Securities and Exchange Commission (SEC), making them subject to all the same rules as stocks, bonds, ETFs, and other securities.
While utility tokens are not currently classified as securities, there has been some speculation that one day, they could be. Even though these tokens are not intended to represent an investment the way that security tokens are, that’s not what matters most to regulators. The SEC uses something called the Howey Test to determine whether or not an investment is a security.
The criteria of this test are:
• A monetary investment
• People invest because they expect to make money
• The investment is a “common enterprise,” meaning investors will only make money based on what the issuers of the investment do
• Profits are dependent on the work of a third party
If the investment in question checks the above boxes, the SEC considers it a security. It’s not difficult to argue that they can apply to most tokens and cryptocurrencies.
What Are Utility Tokens Used For?
A utility token can serve just about any purpose a developer wants it to. In general, utility tokens provide access to a specific service or product with a blockchain ecosystem. In other words, you might need a certain utility token to be able to perform actions on an altcoin’s network.
While cryptocurrencies are a form of digital money, utility tokens might be better described as pieces of software. They can be used to transfer value, but that’s generally not their main purpose.
To swap tokens on a decentralized exchange (DEX), or do any number of decentralized finance (DeFi) activities, users may need a specific DEX token. Alternatively, such a token could be used to reward users of the platform or to pay out interest to those who deposit funds that the platform then lends out to borrowers.
Non-fungible tokens (NFTs) serve as a type of unique utility token, too. An NFT token is a one-of-a-kind digital piece of art, although NFTs can also be applied to things like music.
Utility tokens that have been used in Initial Coin Offerings (ICOs) could even be used for malicious or fraudulent reasons. For example, during the ICO craze of 2017-18, some new blockchain projects offered utility tokens to investors with promises of great returns. In reality, the projects were fake, and there wasn’t even any new software application being built. Investors who decided to buy ICO tokens like these often had no recourse and lost everything.
Up to $100 in bitcoin2 – just for you.
With 30 coins available, our app offers a secure way to trade crypto 24/7.
Examples of Utility Tokens
There are countless crypto projects that have made use of a utility token. Here are a few popular utility token examples. Most of these tokens run on the Ethereum network.
Basic Attention Token (BAT)
BAT token works with the Brave browser, which is designed to be secure and private. The Basic Attention Token allows for a new advertising revenue model that does away with the need for constant tracking of user’s behavior. Brave users can earn BAT by opting-in to view advertisements. BAT can then be used to tip content creators on their websites or on Twitter.
Chainlink (LINK) is what’s known as an “oracle.” Oracles input data from an external source and upload that data to the blockchain. This can be useful for smart contract applications that need real-time price data.
0x hopes to create a secure and fast crypto trading platform that incorporates elements of both centralized and decentralized exchanges.
Binance Coin (BNB)
Binance Coin (BNB) falls under the category of “exchange tokens,” or a token that is native to a specific crypto exchange’s ecosystem. In Binance’s case, users who hold BNB on the platform enjoy a 25% discount on trading fees. Instead of the fees being taken in the form of fiat or the crypto being traded, fees are deducted from the trader’s BNB balance instead.
Zilliqa is a platform for creating decentralized applications. The goal is to make these apps more affordable and secure for developers. ZIL tokens also have uses in gaming and facilitating digital advertising.
Aurora is a decentralized banking platform for crypto. The system runs on smart contracts. The AOA token is a stablecoin that is backed by endorsements, debt, and reserves of cryptocurrency. There’s also a decentralized exchange.
What Are the Challenges of Using Utility Tokens?
Aside from regulatory challenges, there are technological and market challenges associated with the use of utility tokens.
One technical challenge involves transaction fees. Because many utility tokens are ERC-20 tokens running atop the Ethereum blockchain, Ether gas fees can sometimes get very high. As more people vie for space in the next block, they bid up gas prices, making it more expensive for everyone to make any transaction on the Ethereum network.
Like most altcoins, utility tokens can be used as vehicles for financial speculation. Depending on the purpose of the token, this could raise issues. If a certain dollar amount of tokens is required for users to do something on a network, and the dollar value of the token fluctuates wildly, users may struggle to anticipate how many tokens they need.
This is part of the reason why some utility tokens are stablecoins, or coins that are designed to maintain a 1:1 ratio with another asset, most commonly a fiat currency like the U.S. dollar.
A utility token is a type of token that has a specific use case. Most of these tokens are created on an existing blockchain like Ethereum — the applications that these tokens are used for are created using Ethereum smart contracts, and the token then runs atop the Ethereum blockchain.
Some other platforms that developers might use for similar purposes include Solana (SOL), Tron (TRX or Tron token), or the Binance Smart Chain.
For investors curious about crypto trading, SoFi Invest® offers trading with more than two dozen cryptocurrencies, including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.
Photo credit: iStock/PeopleImages
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
First Trade Amount