- A token is a cryptographically based unit of value that is issued by an entity on a blockchain and can represent an investor’s stake in the project or can have an economic purpose.
- The most frequently used classification is depending on the functionality that the token incorporates.
- While a Security Token represents ownership over a company, Utility Tokens allow people to perform some action on a certain blockchain.
Contrary to what many might think, there are different types of tokens that are included within the term “Cryptocurrencies”. In fact, the term cryptocurrency refers to several specific types that fall into two categories: Coins, and Tokens.
This guide details the differences between Utility Tokens and Equity Tokens and why it is essential to learn to differentiate them, but to do so, it is first necessary to understand what a token is.
What is a token?
A Token, also known as a Crypto Token, according to William Mougayar, author of ‘The Business Blockchain’, is:
“A unit of value that an organization creates to govern its business model and empower its users to interact with its products, while facilitating the distribution and sharing of benefits among all its stakeholders”.
Thus, a token is a cryptographically based unit of value that is issued by an entity on a blockchainand, in addition, uA token may represent an investor’s share in the project or may have an economic purpose.
In this way, there are different types of tokens and there are different classifications depending on the various characteristics that these assets have. The most frequently used classification is depending on the functionality that the token incorporates.
Some of them can be: Platform Tokens, Security Tokens, Transactional Tokens, Utility Tokens and Governance Tokens. In this guide we will focus on understanding what utility tokens are and how they differ from equity tokens, being a subset of security tokens.
To understand the differences between these two types of tokens, it is first necessary to understand what each one consists of.
What is a Utility Token?
His name reveals a clue: Utility. This type of cryptographic token is used for some use case within a specific ecosystem. That is, this token allows people to perform some action in a certain blockchain.
Nevertheless, its usefulness begins and ends in its ecosystem, that is, it has no use in some other ecosystem.
This type of token has frequently been used in Initial Coin Offerings (ICOs). Basically, the projects sold these tokens as a way to obtain financing and, therefore, guaranteed their holders to have future access to the company’s product or service.
This does not mean that the holders of the utility token have access to some type of participation in the ownership of the project, they only give the holders the ability to execute some action within the ecosystem that the project is creating.
Characteristics of a Utility Token
- They grant access to a certain product or service within an ecosystem.
- They are usually used by nascent projects seeking financing.
- They are the most common type of tokens, especially because of the role they played in the 2017 ICOs.
- The value of this type of token is based mainly on its usefulness, in addition to its supply and demand.
- At a nominal level, utility tokens work just like any other cryptocurrency.
- They do not represent in any way a participation within the ownership of the project.
What are the use cases of this type of tokens?
Once it is understood that these types of tokens are identified by having a utility within an ecosystem, it is worth asking: what are they used for?
The use that can be given to it depends on the project and the objectives of the developers. In general, they are usually tokens that are used to maintain the security and decentralization of the network.
Here are some of the most important use cases:
- Pay gas and transaction fees: At the time of carrying out an operation with a Smart Contract, it is required to pay a fee for the energy consumption that it takes to execute it, therefore, in some ecosystems, there is a token that is used to make these payments and, in some cases, it has the ability to reduce or eliminate the cost of certain fees.
- network security: Particularly in blockchains with a Proof of Stake (PoS) consensus mechanism, tokens are required whose utility is to maintain the security of the blockchain, for which the holders must store them in the network and, in exchange, they will receive rewards.
- Identity / Exclusivity: One of the uses, although perhaps less frequent, of a token within a project is that it allows developers to know who their most loyal users are. This, you can run marketing and public relations campaigns.
- governance: This is one of the most relevant use cases for tokens today. With the aim of decentralizing the network, the project launches a token that grants a certain participation in voting.
Examples of Utility Tokens
- Basic Attention Token (BAT): This is the token created by the Brave browser. Therefore, BAT is part of the new advertising revenue model introduced by the browser. In this way, users can receive BAT as they watch ads and can also use it to reward their favorite content creators.
- Apecoin (APE): It is a utility token within the NFT ecosystem. It is the governance token of the Bored Ape Yacht Club NFT ecosystem.
- Binance coin (BNB): It is the utility token of Binance, one of the leading crypto exchanges on the market, and with it, users can get trading discounts when trading on the platform.
Is bitcoin a utility token? No, Bitcoin is a cryptocurrency that was designed to be a purely digital currency intended for peer-to-peer exchange. Therefore, it is considered a cryptocurrency in its purest sense.
While crypto tokens are implementations of Smart Contracts rather than being built into the Blockchain software itself. For example, BAT is an ERC-20 token that runs on the Ethereum Blockchain.
What is a security token?
Since equity tokens, or Equity Tokens, are a subset within the ‘Security Tokens’ category, it is necessary to start with the more general concept.
This type of token is linked to financial securities. They are basically a digital stock certificate that records your ownership on the blockchain, i.e. A Security Token represents ownership over a company and thus differs from Utility Tokens in how its value is derived.
Basically, this type of token offers companies the possibility of obtaining financing from the sale of shares in digital form or as tokenized capital. In other words, it is about the convergence between the traditional stock system and the cryptocurrency market.
And, therefore, these types of tokens are regulated by organizations such as the United States Securities and Exchange Commission (SEC) since they represent real ownership of the underlying assets.
Characteristics of a Security Token
- It is an investment asset
- It is a digital asset that represents ownership and rights to something.
- They are the digital form of traditional investments such as stocks, bonds or other assets.
- They are regulated by agencies such as the SEC.
What is an equity token?
An Equity Token is a type of Security Token that works even more like a traditional stock asset, as they grant some form of ownership over an asset.
Each Capital Token will represent a percentage of the ownership of some type of asset, they can be Stocks, Futures, Options, Real Estate, companies, etc.
In fact, this type of token has been promoted as “the action of the 21st century”, since its bases are based on the concept of traditional actions. What does this imply? Well what toThose who own an Equity token will not only have property rights, but will also have rights to a part of the company’s profits and to vote.
These differ from traditional shares in how ownership is registered: While traditional shares are registered in a database and accompanied by a paper certificate, an Equity Token, it is registered on a blockchain, and! what better way to prove ownership!
Equity Token Characteristics
- They represent shares of an underlying asset, usually shares of a company.
- They give holders the right to vote on the issues of the issuing company through the Blockchain.
- They provide the right to obtain a part of the profits of the company in the form of dividends.
- The value of the token is usually not linked to the demand in the cryptocurrency market, but to the performance of the issuing company.
- They are regulated by the securities laws of the country in which the issuing company is headquartered.
- They are issued through a stock token offering process.
- Unlike traditional stocks, equity tokens are recorded on the Blockchain.
Capital Token Examples
- Neufund
- The Elephant Private Equity Coin
- slice
Utility Tokens vs. Equity Tokens
Now, let’s see some differences between the two tokens:
- Utility tokens are not regulated. Capital tokens are.
- Utility tokens do not provide ownership rights to the underlying asset, while equity tokens do, typically to a share or share.
- Utility tokens provide access to a use within the ecosystem. While the equity tokens grant the right to vote and receive part of the dividends from the profits of the company.
- The value of utility tokens is tied to their usability and thus to market supply and demand. The value of the equity tokens is usually exclusively linked to the performance of the company.
- Utility tokens are distributed through Initial Coin Offerings (ICOs). Equity tokens use another distribution model called an Equity Token Offering (ETO).
Why is it important to differentiate them?
Before investing in any cryptocurrency, it is essential to understand its nature and, therefore, the risks.
Once a person understands what utility tokens are and what equity tokens are, they will be able to make informed investment decisions and thus avoid making mistakes.
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