In this article we are going to talk about the utility token. The following two topics will be covered: What types of cryptocurrencies are there and how do they differ from each other?
Table of Contents
What are utility tokens?
Utility tokens can be used to access or pay for a product or service of a particular crypto project. The tokens have a specific use-case within the ecosystem of the blockchain project. These types of tokens are therefore also often called ‘User Tokens’. The majority of the utility tokens in the current market are ERC-20 tokens and thus developed on the Ethereum blockchain.
A utility token is originally not intended to serve as an investment, as these types of tokens are focused on the token functionalities of the respective blockchain project. Nevertheless, there are a lot of cryptocurrency investors who only buy utility tokens for a profit. Quite understandable too, since the majority of the current token market are utility tokens and many of them have surged in price.
Characteristics of utility tokens
As a token creator, you enjoy several advantages the moment you create a utility token. For example, you do not have to comply with certain laws that apply to other types of tokens. This is because they are not designed as investments. In addition to not having to comply with various laws and regulations, utility tokens have some other characteristics, namely the following:
- Utility tokens operate on an existing blockchain that smart contracts are developed on, such as the Ethereum Network.
- Each token has its own functionality and in most cases can only be used within one specific blockchain project.
- They allow for digital trading.
- They are more than just a means of payment. For example, they are also used as proof of a product or a share.
However, there are also many utility tokens that did not turn out as planned. Below are some examples of issues that utility token investors have encountered:
- The tokens have no real ‘use-case’ because the idea was not feasible in practice.
- The utility tokens are not adopted by the target group, which means that the tokens are not used, or are used infrequently.
- The owners of the tokens have no control, so the founding team can make their own decisions about the functionalities and future of the tokens.
- The tokens are not liquid, meaning they are barely tradable. This is generally bad for the value of the tokens.
ETH is a good example of a utility token. Built on the Ethereum blockchain, ETH is the utility token used to cover transaction fees and manage smart contracts. Uniswap (UNI) is another example of a utility token. Uniswap is a decentralized exchange built upon the Ethereum Network. UNI is used as a governance token within the platform by its users. A third example of a utility token is Sirin Labs Token (SRN). This token is developed to allow investors in Sirin Labs to make use of SRN by paying with it for products and services offered by Sirin Labs. The best-known product of Sirin Labs is ‘Finney’, a smartphone designed specifically for cryptocurrency users.