Logo
Carla Moretti
Carla Moretti
With almost two decades of experience in the fast-paced financial industry, Carla has established herself as a powerhouse and an innovative leader.
Table of Contents
    Add a header to begin generating the table of contents
    1. Home
    2. /
    3. Guides
    4. /
    5. Beginners
    6. /
    7. What Is a Utility...

    What Is a Utility Token? A Complete Guide

    what is a utility token

    What Is a Utility Token?

    In simple terms, a utility token is any digital asset that is used as a medium of exchange within a specific platform or ecosystem. Utility tokens can be used to purchase goods or services within the platform or to access certain features or functions offered by the platform. The value of a utility token is derived from its utility, as opposed to its status as a store of value like traditional currencies or securities.

    With so many tokens and coins existing in the crypto market today, the discussion can get quite complex for those who are new to the world of digital currency. For the sake of clarity, therefore, we will highlight the differences between tokens and coins before we proceed.

    A coin is the native currency of the blockchain. For example, the native currency of Ethereum is ETH. A token, on the other hand, is the currency of an ecosystem built on top of another blockchain. For example, the MakerDAO ecosystem is built on the Ethereum blockchain. Therefore, its native currency, DAO Maker, will be called a token and not a coin. It is in this category that the digital asset known as utility token falls.

    Let us further explain how utility tokens work. This article discusses how they differ from security tokens and governance tokens, and how their various applications can improve blockchain technology.

    What are Some Examples of Utility Tokens?

    Gnosis (GNO)

    One example of utility token is the Gnosis token (GNO). Gnosis is a decentralized prediction market platform that allows users to create markets predicting the outcome of events and to trade shares in those markets.

    The GNO token is used as collateral within the Gnosis platform (security token) and is also used to access certain features, such as creating new markets or participating in the platform’s governance. The value of the GNO token is derived from its utility within the Gnosis platform and its potential to appreciate in value based on the platform’s success.

    Basic attention token (BAT)

    Another example is the Bat token (BAT), which is an ERC-20 token built on the Ethereum blockchain. Bat tokens are used as utility tokens for the Brave browser. Brave is an open-source web browser that blocks ads and trackers and rewards users with BAT for viewing private ads. Users can earn BAT by watching these private ads or by opting to view additional ads beyond their normal browsing experience.

    The BAT token can then be used to tip content creators to purchase premium content or services on the Brave platform. The value of the BAT token is derived from its utility within the Brave ecosystem as a reward to users who view ads, and also its potential appreciation in value if the platform and usage of the token continue to grow.

    These are just a couple of examples of the many different types of utility tokens that exist in the market today, but they should give you a sense of how these tokens can be used in different platforms or ecosystems to provide utility and value to users. There are other utility tokens, some that work like a product or service, and some that operate as a basic attention token for token holders and let them access additional functionalities.

    Utility Tokens and NFTs

    Cryptokitties Home Page

    In the context of Non-Fungible Tokens (NFTs), a utility token is a digital asset that is used to access certain features or functions within an NFT platform or ecosystem.

    An example of a utility token in an NFT ecosystem is the CryptoKitties token (CK), which is a utility token used within the CryptoKitties platform. CryptoKitties is a decentralized application (dApp) built on the Ethereum blockchain that allows users to buy, sell, and breed virtual cats, represented as NFTs.

    The CK token is used to access certain features within the CryptoKitties platform, such as breeding rare cats or accessing special in-game events. The CK token can also be used to vote in governance decisions related to the platform. The value of the CK token, thus, is derived from its utility within the CryptoKitties ecosystem and its potential to appreciate in value based on the platform’s success.

    Do Utility Tokens Have Value?

    Utility tokens have value because they provide access to certain goods, services, or features within a specific platform or ecosystem.

    Unlike security tokens, the value of a utility token is derived from its utility. The value of utility tokens is dependent on the demand for the goods, services, or features that it provides access to and the overall success of the platform or ecosystem.

    Not all utility tokens have value

    The value of the token can change over time and is subject to the market forces of supply and demand. It’s important to note that not all utility tokens have value and it’s also possible that the value of utility tokens can be zero. If the platform or ecosystem in which the utility token is used fails to gain traction or fails to provide utility to its users, then the token may have little or no value at all.

    Additionally, utility tokens may have value in one platform or ecosystem but no value in another platform or ecosystem.

    Create value_ written on a black board

    How are Utility Tokens Created?

    Utility tokens are typically created through an initial coin offering (ICO) or initial token offering (ITO). An ICO/ITO is a fundraising mechanism in which a company or organization creates and sells a limited number of tokens to the public to raise capital for the development of a platform or ecosystem.

    The process of creating a utility token typically involves several steps, which are discussed next.

    1. White Paper: The company or organization writes a white paper, outlining the details of the platform or ecosystem, the problem it aims to solve, and the use cases for the token. The white paper may also include information about the team, the road map, and the token economics.
    2. Token Creation: After the white paper is published, the company or development team creates the token using blockchain technology, typically with the help of smart contracts.
    3. ICO/ITO: The company or organization conducts an ICO/ITO, in which it sells a certain percentage of the total token supply to the public in exchange for cryptocurrency, usually Bitcoin or Ethereum.
    4. Token Distribution: After the ICO/ITO is completed, the tokens are distributed to the buyers’ wallets.
    5. Token Listing: The tokens are then listed on cryptocurrency exchanges, allowing buyers to trade them on the open market.

    It’s worth noting here that regulatory environments can vary considerably around the world, and ICOs/ITOs may not be legal in all jurisdictions. It is, therefore, crucial for companies or project teams to comply with local laws and regulations before conducting an ICO/ITO.

    Final thoughts

    Utility tokens are not the only type of tokens out there; there are also various other tokens like security tokens, governance tokens, tokens that provide special access, and tokens used for voting privileges, voting rights, and raising funds.

    Unlike coins and security tokens, utility tokens are digital assets that help to fulfil a specific function, for example, to lubricate the economic system, or allow the holders access to a particular service.

    Many crypto projects, decentralized storage systems, and decentralized applications could not do without utility tokens. We hope this article answers the question “what is a utility token?” for you. Any token holders, or those considering buying a security or any other digital asset should always do research and exercise caution with any investments.

    FAQ

    Most frequent questions and answers

    Bitcoin, XRP, DogeCoin, and Polkadot are not considered to be utility tokens. They are regarded as cryptocurrencies.

    Bitcoin is a decentralized digital currency, XRP is a digital asset currently mainly used by Ripple Labs, and DogeCoin was created as a joke inspired by the doge internet meme but now has an active community. Polkadot, on the other hand, is a multi-chain protocol that enables interoperability between different blockchain networks.

    They are used as mediums of exchange and a store of value. Also, they operate independently of any particular platform or ecosystem.

    The most common type of utility token is the ERC-20 token, which is built on the Ethereum blockchain. ERC-20 tokens are widely used for initial coin offerings (ICOs) and other decentralized applications. They follow a set of standard rules, which makes them easily transferable and compatible with other tokens and smart contracts on the Ethereum network.

    No, an NFT (non-fungible token) is not a utility token. NFTs are unique digital assets that represent ownership of a specific item, such as digital artwork or collectibles, while utility tokens are used for accessing a specific service or product within a decentralized platform.

    Subscribe and Receive a Free Copy of Our E-book
    Bitcoin E-book on a tablet

    Skrumble.com provides all its content for informational purposes only, and this should not be taken as financial advice to buy, trade, or sell any investment instruments or products, including but not limited to cryptocurrencies, or use any specific exchange. Please do not use this website as investment advice, financial advice, or legal advice, and each individual’s needs may vary from that of the author. Investing in financial instruments, including cryptocurrencies, carries a high risk and is not suitable for all investors. It is possible to lose the entire initial investment, so do not invest what you cannot afford to lose. We strongly advise conducting your own research before making any investment decisions. This post includes affiliate links with our partners who may compensate us.

    To view our privacy policy read here.

    You may also be interested in:
    Scroll to Top

    Get Your Free Bitcoin Trading E-Book!

    Simply insert your info, hit the button subscribe and you will receive an e-mail with a link to view and download the E-book. Remember to check your spam if you do not see our e-mail.