Ever since the introduction of Bitcoin in 2009, a wide array of cryptocurrencies and tokens have emerged and operated as digital currencies around the world. The concept of cryptocurrency was intended as an alternative to money for daily use. It has a long way to go before it replaces cash but is currently utilised for many uses in the financial sector, including investments and raising capital.
With the ongoing developments in the crypto world, innovations such as security tokens and utility tokens have emerged and opened up new possibilities in the financial and utility markets. To figure out their major differences, here’s a basic guide to ease you through the crypto landscape.
What are utility tokens?
Utility tokens are currently the most popular form of tokens due to the surge of blockchain startups in recent years. These startups raised money through initial coin offerings and then created their own currency within the blockchain system in the form of utility tokens, which they sold to the public.
However, utility tokens serve other purposes beyond raising funds. Utility tokens also act as digital assets designed for spending within a blockchain ecosystem. They enable future access to the products and services offered by a company. Often, tokens create incentive strategies that encourage people to perform specific actions on the promise of compensation. For example, companies wanting to increase engagement in environmental practices can utilise tokens as incentives to give out to people who use renewable sources of energy. In this light, utility tokens serve as a tool to drive human behaviour within a blockchain ecosystem.
What about security tokens?
Security tokens are a more recent invention in the crypto world. Considered by many to achieve mainstream adoption, security tokens focus on giving a trade value to digital and non-digital company assets. This makes them useful for almost any industry or application.
A security token acts as an investment contract. It represents legal ownership of a physical or digital asset that has been verified by the blockchain. With this legal and verifiable ownership, investors have the ability to easily trade their tokens for other assets, take a fraction out to store in other digital wallets or even use them as collateral for loans.
The major value of security tokens is their potential to change how people define asset ownership. These tokens make assets accessible to people globally, giving them the power to own portions and collect dividends from foreign corporations. When we think about all of the company assets in the world, the possibilities of security tokens are endless.
What sets them apart from each other?
The major differences between the two are their intended use and functions. Security tokens are created as investments. Security token holders are given dividends in the form of additional coins each time the issuing company earns profits in the market. Investors also earn ownership of the company that allows them to vote and influence the decisions made by the corporation.
On the other hand, utility tokens do not give their holders the ability to control the decisions of the company. They merely allow users to interact with a company’s services in the blockchain ecosystem.
Cryptocurrency is poised to cause major innovations in industries by making it possible to create new business models. With digital currency upon us, learning the fundamentals and the differences of the tokens used in the crypto world is valuable for both investors and company founders to maximise returns.