The possibilities of the blockchain technology causing disruptions in almost all industries making it possible to create a wide array of new business models are high. Useful innovations have been born by the blockchain technology like the decentralized networks, open source distributed ledger and trustless networks. The use of tokens is one of the significant factors that have contributed to the success of blockchain technology.
These are simply user tokens enabling future access to products and services offered by an organization. Utility tokens, unlike security tokens, were not created as an investment. Utility tokens are a form of digital assets created for spending within a particular blockchain ecosystem.
How do utility tokens work?
Utility tokens are the most popular form of tokens today due to a mass wave of blockchain startups emerging every year. Startups raise money through Initial Coin Offerings which requires them to create tokens to sell to the public in exchange for Ethereum or other cryptoassets.
These tokens however serve another purpose apart from simply raising funds. Take an example of a utility token like Binance which has a strong case of being a utility token according to eToro. The token can be used to create unique incentive schemes enabling people to perform unique actions within the ecosystem knowing they will be compensated.
One good example of token incentive is a model that motivates people to use renewable energy. This way they track the data and report it for energy use using IoT devices and they receive tokens as compensation through the blockchain.
The ERC20 Ethereum standard is the most common type of utility token using it, companies build decentralized applications on the Ethereum blockchain and launch ICOs using the tokens.
Advantages of utility tokens
The ease of production of the tokens has led to amazing quality and regulatory assurance that are challenging for the crypto space. Companies have good intentions when launching tokens and raising funding through ICOs. There are however other scams that present themselves as value-driven companies but they seek to raise money and never develop the product.
Important thing to note
There is some confusion when differentiating between utility tokens and security tokens. Some people could argue that there are utilities which are simply securities but hiding within the utilities. The Howey Test gives a clear distinction of the two outlining what a token should consist of to be judged as security.