UTILITY TOKENS

In the world of cryptocurrencies and all, it is not exactly as straightforward as it seems. Not everything is a coin, or even a cryptocurrency in that sense of it. There are strict definitions for each terminology in as much as they are often used loosely in some contexts. These distinctions are important in effectively making informed trading and investing decisions. One of such is distinguishing between coins and tokens. Another is distinguishing between one kind of token and another. Types of tokens include security tokens, utility tokens, governance tokens, etc. This piece is an attempt to break down what governance tokens are, and what exactly sets them apart from other tokens.

Utility tokens are an asset class that serve the purpose of helping to pique the interest of investors as regards a project. Basically, utility tokens serve as some sort of appetizer building up to a bigger project. Thus, utility tokens often appear even more in ICOs (Initial Coin Offerings). They are usually packaged and designed to make it attractive to investors. Like I mentioned earlier, terms such as coin and token denote different things. Coins predominantly function as a means of exchange, while tokens usually promote a separate inherent value to the project it is attached to. Flowing from this definition, utility tokens are usually structured in such a way that the tokens will provide the investor with some special bonuses or services when the main project itself launches. Thus, it is usually an elaborate crowdfunding process. The value of the token is arbitrarily preset by the developers of the project, along with the total mint supply. Often the token also has some sort of interesting utility attached to it, such as holders’ priority over non-holders when the project eventually goes. Interested investors are thus incentivized to secure quantities of the tokens for themselves by paying fiat currencies, or even some other cryptocurrency, to the project team. The money raised from these tokens is then used to fund the development of the main project itself, with the hype surrounding the pre-sale also serving as massive PR for it. Utility tokens might look like, at first glance, governance tokens. However, they are quite different. Governance tokens are tokens that are allotted to measure as the extent of a person’s voting power in a project. Utility tokens, however, usually serve the purpose of offering the buyer access to the project’s future services, but does not offer much any further.

Now, how exactly do people profit from utility tokens? One might think though, that utility tokens will derive its value from the progress of the main project. This is not true, however. Utility tokens are not usually integral parts of the main project, so they practically do not possess a great deal of proper remoteness to closely follow the project’s trajectory. Their real value really comes from the place of demand, like a commodity. It usually has a fixed supply and, more often than not, a series of sessions indicated in the whitepaper during which the supply will reduce gradually. With this deflationary model, popular utility tokens that can retain their trading volume will become more valuable as demand increases when supply decreases. So how well a utility token does is often very dependent on the popularity and hype it is able to garner.

So there you have it. Utility tokens differ from such other kinds of tokens, but are equally popular. This is because a successful utility token possesses the potential for a huge ROI for the buyer. However, this also comes with a certain degree of risk. Not every token will witness a meteoric rise, while some others might turn out to be fraudulent schemes. This is also not aided by the fact that utility tokens hardly have any form of regulatory framework for it in most jurisdictions. So an attempt to buy into utility tokens should be approached with a high level of caution. But when you do strike hard, you can be sure to strike gold.