EMURGO: Blockchain Primer: What is a Utility Token? How is it different from a Security Token?


In the Merriam-Webster dictionary, a utility token is defined as the following, “a digital token of cryptocurrency that is issued in order to fund development of the cryptocurrency and that can be later used to purchase a good or service offered by the issuer of the cryptocurrency”

In simple terms, a utility token is a blockchain-based asset people buy with the intention to use for something in the future. As a simple example, a company developing an online game could issue utility tokens to fund the development of the game. Once the game’s development has finished, the token owners could then use the tokens for in-game purchases. The game developers gain access to capital to fund their project, and gamers access in-game tokens for future use. However, utility tokens are not limited to simply buying items in a virtual setting. They are a versatile and powerful medium with a wide range of uses, some of which we will explore in this post.

Firstly, what is a token? A token is a means of exchange to give value to a transaction. Tokens have value, and exist on a blockchain. While tokens have value, it’s the intended purpose of the token that defines whether it is a utility token or not. Utility tokens are often confused with security tokens where the intended purpose is not clear. As we have seen in a previous post, a security token is purchased by someone as an investment. The buyer of the security token does so with the expectation of profit. For the value of a security token to increase, the investor relies on a third party. For a security token representing real estate for example, the real-estate developer would be expected to increase the value of the investment for the token holder.

Unlike a security token, utility tokens are not bought with the intention of return on investment. They are simply bought to be used rather than seeing an appreciation of value. Utility tokens have functionality baked into their core. Because of this, there are a wide spectrum of use cases for utility tokens. A utility token can do many different things and has many different applications.

Why are Utility Tokens Relevant in 2019?

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