Everyone has heard of Bitcoin, Ethereum, and cryptocurrency in general, but did you know there are other forms of crypto tokens that instead of being a digital currency, serve specific functions, while utilizing Blockchain technology? These are known as Utility Tokens.
In this guide, we will provide a thorough explanation of what utility tokens are, and the various purposes they serve, what makes them so popular, and whether they actually provide an investment opportunity.
What Are Utility Tokens?
Utility Tokens are developed to serve a specific purpose or function within a network, allowing the holder/ user of the token to perform a task that would not be possible, or difficult to achieve without it.
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Each utility token is specific to the network it belongs to, this could also be described as a digital ecosystem that is made up of multiple parties and networks. An example of a single-use utility token would be the Brave Basic Attention Token (BAT).
Using the token, people can donate to content creators, via the Brave browser, or through digital wallets that have BAT integration – this is the sole purpose of the utility token.
Unlike cryptocurrency, utility tokens cannot be mined and are purely developed for use within a system. Every token is typically created at the same time and distributed to whoever has use of the token.
Why Have Utility Tokens Grown In Popularity?
The easy answer to this question, is that utility tokens are very useful. Utility tokens can be created for almost any online function, and are only limited by the skill and the imagination of the developer.
The main purpose of a utility token is usually to provide access to a system or service, that would not be possible without the said token. Basically, a lot of utility tokens are primarily pieces of software that are used to grant permissions.
This type of token is especially prevalent on decentralized finance networks, allowing the holder of the token to make transactions and access certain information.
NFTs are sort of a mix between a utility token and a security token, as they represent a completely unique asset, typically a piece of digital art or music. Owning the NFT token means you own the art – resulting in a new trend of digital art collecting and a new way for artists to earn money.
What Are The Different Types of Utility Tokens?
We have already discussed the Basic Attention Token (BAT) that is used on the Brave browser, so let’s take a look at more examples.
Chainlink – One of the most well-known forms of a utility token, Chainlink is classified as an Oracle and its purpose is to input and process data from external sources that is then made available on the Blockchain. Oracles are heavily used in the processing of smart contracts.
Ziliqa – The Ziliqa platform assists developers in building decentralized finance platforms by making the process more affordable and with added security. The Ziliqa token is used for performing various functions within the platform.
Aurora – The intention of Aurora is to construct a decentralized banking platform that is built from smart contracts. The Aurora token is technically a stablecoin that maintains its price as it is backed by cryptocurrency reserves, however, it is also used to grant access on the platform.
Uniswap – Uniswap is a decentralized exchange on the Ethereum blockchain and was initially built without utility token integration, however, a token was since developed that allowed users to have input on the future protocols of the platform.
Arweave – Arweave is a decentralized storage network that aims to create a permanent storage option on a permanent version of the internet called the Permaweb. The Arweave token is used as payment to miners in return for data storage.
Decentraland – Decentraland is a metaverse (or virtual world) and is the most widely used on the Ethereum blockchain. The metaverse uses two utility tokens, MANA and LAND.
MANA allows users to make in-game purchases, such as items, avatars and virtual land, while LAND represents virtual real estate within the metaverse, given in exchange for MANA.
Enjin – Enjin creates blockchain-based gaming tools that can be used by developers, enabling them to create virtual products within a metaverse. The Enjin token is the NFT of the newly created product.
Can I Invest In Utility Tokens, and How?
Technically, although utility tokens are not created to be traded, it is possible and like any type of crypto token they are open to financial speculation.
However, not all utility tokens are tradeable and need to maintain a set value. For example, if there is considerable fluctuation in the value of a token, then it becomes difficult for the user to know how many tokens are required to perform a function, and these fluctuation can occur on a minute-by-minute basis.
This is why many utility tokens are developed as stablecoins, meaning they will always maintain a set valuation linked to a Fiat currency or cryptocurrency – this means that the token will always hold a constant price.
From an investment perspective, utility tokens can be a great way of diversifying your portfolio, especially tokens such as Chainlink that can handle market fluctuation. Even stablecoins can play their part in a balanced and diverse crypto portfolio to minimize risk.
Utility Tokens – A Summary
Here is a brief summary of the above guide, condensed into a bitesized list.
- Utility tokens are designed to perform specific tasks and functions within a platform, network or virtual ecosystem.
- Utility tokens differ from cryptocurrency and digital securities as they are not designed to be traded.
- Most utility coins are stablecoins that maintain a constant value.
- Utility tokens can still provide a worthwhile investment opportunity as part of a diverse portfolio.
Thank you for reading, we hope this guide has helped to give you an understanding of what a utility token is and how they can be used.