The world of cryptocurrencies is rich and complex with a lot of things to discover. Beyond the more habitual cryptocurrencies that work as actual money, there are other types of crypto assets that take part in the complex apparatus of crypto. One of them is utility tokens. What are utility tokens and how understanding them will help you in your crypto ventures? Let’s discover.
Understanding Utility Tokens
Most cryptocurrencies you know – Bitcoin, Ethereum, Tether, etc. – are designed to execute the function of money. They can be used to purchase goods and services, they can be bought and sold, and they can be exchanged for other cryptocurrencies or traditional currencies.
Utility coins are, in turn, a different type of token, that are created and maintained with the same technology and system – the blockchain – but perform different functions.
Utility coins are mostly issued by various apps and services, each serving a particular purpose within the network. There is no finite list of functions that can be performed by a utility token. Rather, services launch tokens for certain not exactly financial purposes and the token of the type is referred to as a “utility token”.
For example, in Filecoin – a decentralized storage network based on blockchain – utility tokens are used as a form of internal currency it acquire storage space. By contributing to the network in different way users can get these tokens and use them to get more storage.
Another example is the Basic Attention Token released by the Brave browser. Users collect the token passively while using the browser and coming across the ads provided by it and the token can be further used as a tip for various creators.
Further usage cases of utility tokens will be analyzed below.
Exploring the Advantages and Disadvantages
Advantages of Utility Tokens
- Access and Use: They provide access to services, goods, or certain privileges within a platform, being often used as a currency to easily access the functions and offers of the platform.
- Economic Incentives: Utility tokens may also serve as an economic incentive. Users are encouraged to use them as they give them discounts or other benefits.
- Decentralization: Utility coins work based on blockchain, getting the benefits of this system, such as security, transparency, reliability, pseudonymity, and others.
- Tokenization of Assets: Utility tokens may be used to tokenize valuable objects of the real world – pieces of art, real estate, and others – for drawing a bunch of benefits – making it easier to trade the assets, to claim the ownership, etc.
- Global Accessibility: Utility tokens are not subject to the regulations posed by any local authority, meaning that they can be used equally in any region of the globe.
- Reduced Transaction Costs: Transactions involving utility coins are generally cheaper ones involving traditional currencies, provided by the decentralized and autonomous nature of the blockchain. This is especially noticeable when we deal with international transactions.
Disadvantages of Utility Tokens
- Regulatory Uncertainty: Although this can seen in most cases as an advantage, utility coins like other blockchain-based entities are not regulated by any jurisdiction, which enables their use in areas that aren’t legal.
- Volatility: Since utility tokens are also often subject to high volatility, they can be seen as not particularly reliable as an asset in certain cases.
- Lack of Intrinsic Value: Unlike proper cryptocurrencies, utility tokens are not supposed to have an intrinsic value beyond the network they are used in. In this way, their use is limited and if anything happens to their ecosystem or you just stop using the platform, you don’t have guarantees of easily converting them into other assets. Beyond that, their value is also highly dependent on the values of actual cryptocurrencies.
- Scalability Issues: In certain cases, utility tokens networks tend to experience scalability issues leading to slower transactions.
- Security risks: Although anything based on blockchain is considered pretty much dependable, the risk of hacking and fraud are still present with this type of asset.
- Market Saturation: There are lots of utility tokens on the market, so it may be pretty hard to figure out, which projects are worth investing in.
Practical Use Cases of Utility Tokens
Beyond the examples below, there is a bunch of case of successful utility tokens. Here are a few of them:
Golem (GLM): Golem is a decentralized supercomputer network where utility coins are used to rent the computing power. To earn the token, users can rent out their own computing capacities.
Civic (CVC): Civic is a decentralized platform that uses utility tokens for providing identity verification of users.
Power Ledger (POWR): Power Ledger is a decentralized platform for trading energy, where utility tokens are used as an internal currency.
The Road Ahead for Utility Tokens
The future of utility coins appears to be pretty lucid as they offer lots of ways to take advantage of the features of blockchain technology within a single platform. An increasing number of companies are exploring the potential of utility tokens and numerous experiments turn out to be successful. A kind of currency that is exclusive for a certain environment where the benefits of blockchain are involved seems attractive to numerous companies, that’s why utility coins are expected to develop more and more.