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Understanding utility and security tokens

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There are different cryptocurrencies which include tokens. Understanding the type of tokens helps people to make informed investment decisions. At times, investors lose out when they invest in crypto projects which they do not fully understand. Yet, in some cases, people get lower rates of return than they expect.

What are tokens?

With regards to the blockchain, a token is a cryptocurrency which is built on another blockchain. Thus, tokens are fungible and programmable digital assets existing on a blockchain. The two broad types are security tokens and utility tokens.

Utility token

A utility token is a cryptocurrency designed for spending on a specific platform, fulfilling a certain function. For example, a company can use a particular token to reward its community members who perform different activities on its platform such as curating content.

In some cases, a utility token enables its holders to use certain products or services which the company provides.  A good example of these are app tokens which people use to access different features. Sometimes, token holders get discounts when buying goods and services.

Currently, there are various utility tokens, with the following examples:

  • Basic attention token (BAT): This is a token for powering advertisements on the brave browser. In this case, users who view certain advertisements (Ads) get the tokens as a reward.
  •  Filecoin: This is a token that drives a decentralized storage network. Therefore, Filecoin is used to pay for the storage and retrieval of documents.
  •  Swarm: The purpose of SWARM is to tokenize real world assets such as real estate.

The list of utility tokens is long but these few examples help anyone to understand the concept.

Security tokens

Security tokens are mainly investment contracts which represent legal ownership of an asset such as real estate and are recorded on the blockchain. Like other cryptocurrencies they are fungible and tradable. The token can represent a share in a company or voting rights. Therefore, in terms of economics they function in a similar way as bonds, derivatives, and equities.

The issuer of the security token should meet the conditions of the country in which it is based. This is because security tokens are created mainly as investment assets. That is why their holders may receive dividends in form of other coins or in additional tokens.

Advantages of security tokens

In terms of investment, security tokens have advantages over utility ones.

However, the major advantage is that security tokens are registered with relevant authorities like the SEC in the United States of America. Therefore, people can feel safer to invest in security tokens than utility ones. Also, the chance for scams is lower than with utility tokens.

As we pointed above, the holders may receive dividends on agreed time frames such as quarter yearly.

Conclusion

The difference between security tokens and utility tokens is distinct. It is based mainly on the function of the cryptocurrency in question. Utility tokens are mainly for supporting the products or services of the platform or applications, whereas security ones are for investment.

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