Cryptocurrency and blockchain are changing the world by transforming financial services. Though you must be acquainted with Bitcoin and other cryptos, there are other types of digital assets as well.
Cryptocurrencies are divided into two main categories. They are coins and tokens. Coins have some monetary value and are often used for transactional purposes. While tokens have a specific purpose. People use tokens to buy services within a specified network.
What is a Token?
Tokens are digital virtual currencies that run on top of other cryptocurrencies’ blockchains. Tokens have various functions. You can use tokens to buy and sell items in video games. Tokens are also used to raise funds for the development of a crypto product or a cryptocurrency.
Tokens are usually created through initial coin offerings for a new cryptocurrency project. You can then use the tokens inside the company’s ecosystem to stake coins or hold for investment purposes.
Tokens are mostly of two types. They are:
- Utility tokens
- Security tokens
Security tokens are digital contracts to preserve the assets or stock value of the company on the blockchain ledger. These liquid contracts are utilised for real estate, cars, stocks, or other assets that have value.
Utility tokens are different from security tokens as they are issued to fund the development of the cryptocurrency. It can be used within the ecosystem of the company that issued it.
One example of a utility token is ModiCoin. It is a newly launched utility token that holds real assets value. The token is designed to incorporate transparency, auditable, security, and traceability.
What is a Utility Token?
A utility token is a digital token of a cryptocurrency issued to raise funds or for crowd sales for the development of a new cryptocurrency. These tokens are issued to the investors in the Initial Coin Offerings (ICO). Investors can later use the tokens to buy goods, services, or stake coins on the company’s ecosystem.
Every utility token has a specific purpose. It means that you cannot use the utility token issued by one company on the system of another company.
Let us take an example to understand.
Suppose Company A has issued utility token A for fundraising in its ICOs. There is also another company B that is issuing utility token B for its crypto project.
Suppose that you have bought the tokens of both the companies. Now, you wish to buy items on the ecosystem of company A. For this, you cannot use the utility token B. You will have to use the utility token issued by company A that is utility token A.
Similarly for the purchases within company B, you have to use utility token B.
It is because every utility token is built to spend on a specific blockchain network.
Working mechanism of Utility Tokens
With the boom in the crypto industry, we are witnessing a wave of blockchain-based startups. These startups raise funds for their project through ICOs by issuing tokens in exchange for other cryptocurrencies.
The project developer publicly announced the launch of a new project and the number of tokens to be issued in the ICO. The quantity of tokens is decided according to the money needed to develop the project.
ICOs are generally carried out on the Ethereum platform as their technical features support the creation of utility tokens and organising an ICO. You can purchase utility tokens through other cryptocurrencies or even fiat currencies.
Once you make the purchase the tokens are assigned to you. You can use these tokens at a later stage to buy services on the platform. Moreover, you will end up getting huge returns when the company makes profits.
It is because the price of utility tokens purchased in the ICO is much lower than what they acquire on successful project completion.
However, utility tokens do not only have one function of fundraising.
The token can be used to establish one-of-a-kind incentive systems that allow people to undertake unique actions within the ecosystem and be reimbursed for them.
ModiCoin is a newly launched utility token based on Binance Smart Chain that envisions creating a safe space for token enthusiasts. It can be used on the platform for many functions like charity, marketplace, etc.
IOHK announced the development of an Ethiopian utility coin during the 2019 IOHK Summit. The Ethiopian utility token will be designed for Addis Ababa, where utility payments are made at physical offices throughout the city.
The Ministry of Technology has asked IOHK to develop a legally binding digital solution. The solution will bring value by helping individuals to save time and money when paying their utility bills, reducing waste, fraud, and abuse. If the initiative is successful, it will be scaled up to 100 million people. This will allow frictionless transactions from utility users to utility providers within a closed loop.
Utility tokens are versatile as they facilitate fundraising, seamless transactions on the blockchain, payments for decentralized services, and much more. The tokens ensure security and regulatory standards in the volatile crypto industry.