What Is a Utility Token?
Utility tokens, unlike coins, are usually pre-mined and created at one go by the developer of a cryptocurrency network. They’re designed to serve a specific purpose within a platform’s ecosystem, and are generally distributed to investors during the initial coin offering (ICO) phase as a way to generate interest in the product or service. While investors may be able to purchase and use these utility tokens as a form of payment on the network to redeem or gain access to a particular service, utility tokens don’t come with actual monetary value. Unlike the network’s coins, they’re not intended for investment.
That being said, it is possible for a utility token’s value to increase along with demand, especially with a limited supply of tokens. If a token is linked to a decentralized application (DApp), the network’s scalability may enhance the value of the token accordingly.
How Do Utility Tokens Work?
Utility tokens are distinct from security tokens. The latter consists of ownership rights to the company, like a form of decentralized digital shares used for investments. Utility tokens, on the other hand, can only be used within their specific blockchain ecosystem in order to gain access to the company’s products and services.
A specific decentralized exchange (DEX) token only allows you to swap tokens or perform activities on that DEX. These DEX tokens can be issued as a reward for users of the platform, or as interest for those who lend their funds to borrowers via the platform. For example, Brave’s Basic Attention Token (BAT) is a utility token that can only be issued through the Brave browser, or through applications that have an integrated BAT wallet, such as Twitter. Utility tokens generally have no other use outside of the network for which they’re intended.
With the growth of blockchain networks around the world, utility tokens are widely used to raise capital for startups through ICOs, since they can be sold in exchange for other digital assets. The ERC-20 token standard is one of the most extensively used for utility tokens, especially among firms that develop DApps on the Ethereum blockchain (since they’ll eventually undergo an ICO phase using these tokens).
Utility tokens can also serve as incentives to encourage a specific action within the ecosystem. For example, tokens can be issued to users who submit consumption data to improve and fine-tune the existing blockchain’s technology. Despite the usefulness of these network-specific tokens, which led to their widespread use during ICOs in 2017–18, their lack of regulation also resulted in fraudulent cases: Many crypto projects were unable to deliver on their unrealistic promises of large returns for investors.
Examples of Utility Tokens
Many crypto projects have relied on utility tokens in one way or another, whether to raise funds or encourage certain transactions on the platform. For instance, even a non-fungible token (NFT) may serve as a utility token to facilitate transactions within the Ethereum network.
Following are some other examples of popular utility tokens and their usage on different networks.
As a decentralized storage network that allows indefinite storage of data, Arweave uses the AR token to incentivize miners to help store the massive amount of network data.
Basic Attention Token (BAT)
BAT is used as an incentive for both content creators and users who opt to view advertisements. This allows the platform to earn advertising revenue without having to track user behaviors. BAT is usually issued privately and securely, either through the Brave browser or on Twitter.
Binance Coin (BNB)
Chainlink, an oracle that provides real-time data to blockchains from an external source, can be integrated into different blockchains. It issues ERC-20 tokens (LINK) to users who supply accurate, current data to feed into various blockchains. This is particularly useful for smart contract applications in order to track pricing data.
ZIL is the native token used on the Zilliqa platform to enable affordable, secure DApp creation for developers, whether for financial services or NFT marketplaces. ZIL can also be used for transactions in gaming and digital advertising.