Transactional Coins vs. Utility Tokens
As crypto and blockchain technology have gained ground, the evolution of uses and approaches have become increasingly varied, complicated — and confusing! There is a lot of overlap, and not everything fits neatly into a category. Let’s explore two (well, 2.5, really) major categories of crypto and how they can help you.
Transactional Coins
The original cryptocurrency, Bitcoin was designed to be used as money in exchange for goods or services. Its intention was to create a digital, decentralized currency with all the benefits of the blockchain for fast, secure transactions with low (or lower compared to banks and other financial institutions) fees, and no intermediary needed for the global transfer of funds. The intention was (and still is) to move the world from fiat currency, government-backed and centrally-controlled money like US dollars and Euros, to a democratically-controlled, global, digital currency owned and operated by the people. Coins of this type can buy an item online, a cup of coffee in a shop, pay the babysitter or be sent to family across the world. There are even ATMs to buy and exchange transactional coins for fiat currency.
Since Bitcoin was launched in 2009, many forks and new blockchains have created new coins, called altcoins. Basically, any coin that’s not a Bitcoin is an altcoin. They often have the word “coin” in the name, like Litecoin, though people have gotten more creative with names, so that’s not always true. In 2011, Namecoin (see?) was the result of the first fork and since then, hundreds have followed. Not all are created equal, of course, because they can be created by anyone with the necessary technical knowledge and a little time on their hands.
Another use for transactional coins is called store-of-value, in which people buy and hold them in the hopes that they increase in value over time. It’s similar to buying gold bullion in that on its own, a brick of gold doesn’t do you much good, but selling it will get you a nice wad of cash. Also true in this analogy, the value of gold fluctuates far more than fiat currency and is subject to supply and demand.
Utility Tokens
Utility tokens, as the name suggests, were not created with the intention of direct investment or conducting transactions. They serve a purpose, or a utility. Primarily, they provide access to a product or service. The value of the token is derived from the desirability of what the token gives access to. For example, Ethereum was the first major use for utility tokens with Ether used to pay for computations on the Ethereum network. Lumens pay for cross-border fund transfers on the Stellar network, and NEBL pay for the use of API software on the Neblio platform. So, one might buy tokens to gain access to the service it’s intended for, or one might buy them because they believe the service is going to be the next hot thing and the value will therefore increase. Selling them at that point would result in a profit and a happy investor. Of course, if the service doesn’t catch on or isn’t well-run, the value will decrease or never take off.
Utility tokens are not to be confused with equity tokens, which grant the holder a share of the company’s holdings or some part of their funds. Think of it like buying video game tokens at an arcade. Imagine you had to buy specific tokens to play specific games — there’s the utility. More popular games require more expensive tokens, and as a game becomes the hot fad, the price of those tokens increases. If the game breaks down, doesn’t operate as promised or doesn’t upgrade to keep pace with the other games in the arcade, the value decreases. Equity tokens in a video arcade would entitle you to a share of the day’s earnings. Wouldn’t that be nice? Equity tokens are subject to a much higher level of scrutiny by the SEC than other types, so many companies either choose a different type or exploit legal loopholes as long as they exist.
And now for the icing on the cake — the ICO. I’m sure you’ve heard of ICOs, or Initial Coin Offerings, which are crowdfunding events for startups. Utility tokens can be generated on a blockchain and sold to raise money for whatever a company wants to do. These are also often called a Token Generation Event, or TGE. After the close of the ICO or TGE, the tokens will have future value when the service promised becomes functional. Of course, there is risk in ICO participation because many startups never get off the ground. On the other hand, some do, and getting in at the ground floor can have a major payoff.
As this growing market matures, I’m sure we’ll have the scientific clarity of a nice, crisp taxonomy. For now, there are still lots of ways to label and categorize cryptocurrencies. These are a few — more are coming in future posts!
