Utility And Security Tokens — Why Were They Created?

In the Crypto World, there is a big variety of tokens — it is an important unit within a certain project (monetary unit, rate, asset, utility, voting right, etc.). Tokens play a major part in the system. They are the main working elements, which have various functions, tasks and roles. Specially designed smart-contracts are responsible for their management and regulation.

It is important to distinguish two key types of tokens, without which blockchain technology could not have been created: utility tokens and security tokens. Today we will talk about the difference between them, and find out why the crypto industry needs them.

Utility tokens: characteristics

Utility tokens are currently the most common type of tokens in the crypto space. Their main characteristics are:

• providing its owners with access to the services and products of the network;
• use within the initial coin offering (ICO);
• providing the company with additional financing.

At the same time, utility tokens:

• are not an investment unit;
• do not give users the right to own shares of the company (as security token do).

The most famous utility token today is the Basic Attention Token (BAT). It is an ERC-20 standard digital asset created on the Ethereum platform in 2017. It was developed for use internally as an advertising element and was implemented in the new Brave web browser. The Brave browser is distinguished by privacy, security, and effective advertising strategies. It collects data about the user to determine the range of his interests, and shows only those advertisements that will be attractive to him.

The BAT token is actively used as a filter for advertising on websites. In fact, it is an intermediary between advertisers and consumers (network users). The former receive a tool for targeted promotion of the product among its target audience, while the latter see exclusively selected advertising content, for which they also get a reward.

Security tokens

Security tokens are alternatives of securities in the digital space. These digital assets have great functionality. Most often they are used:

• as an investment;
• in public key infrastructure (PKI);
• in payment systems;
• in access systems;
• in the field of network security;
• as a means of generating an electronic digital signature with an unrecoverable private key;
• as an electronic identifier.

Anthony Pompliano, co-founder of Morgan Creek Digital, in his article “The Official Guide To Tokenized Securities” described security tokens as “the intersection of digital assets (tokens) with traditional financial products”. Their main principle is that any asset (real estate, shares, debt obligations) which has the right of ownership can be tokenized.

Security tokens are regulated by federal security regulations, so they fall under the influence of the securities law of the state where they are used. From time to time, companies issuing such tokens will have to provide reporting papers to authorities, since security tokens are linked to real finance. This is the main difference between security and utility tokens which are not associated with fiat.

As stated earlier, security tokens are the same traditional securities, only in the Crypto World. What was the point in making life so difficult and transferring the working elements of the traditional economic system to the digital environment? The main advantage of security tokens over their traditional financial counterparts is the elimination of intermediaries in the transaction. Often banks take big commissions for transactions, which scares off some entrepreneurs. Security tokens work directly, excluding transaction fees. Also, by moving away from third parties, the speed of transaction execution increases and its cost drops.

It is worth noting that not everyone has access to security tokens: it has a high threshold of entry. This immediately cuts off a significant part of the crypto market and unites together experienced entrepreneurs. At the same time, the ICO market, where utility tokens are regulated, is a freer platform with a low entry threshold in order to attract young investors.

Conclusion

Both utility tokens and security tokens were created as a means of transition from the traditional centralized economic system to a new one: digital, decentralized, more secure and democratic. The crypto industry is developing and improving every day, which means that in a few years blockchain technologies will become available to the majority of the population and the use of tokens in everyday life will become absolutely commonplace.

If you want to learn more interesting facts about crypto then check out our blog! You might like our articles “The Ethereum Merge” and “How To Sell Basic Attention Token (BAT)”.

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SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.