Utility tokens are defined as digital assets that are used to fund a network by providing its buyers with a guarantee of being able to consume some of the network’s products.
Of note, utility tokens differ with crypto coins such as Bitcoin as they are not mineable and are instead based on third-party blockchain.
However, similarly to these cryptos, utility tokens are valued only for its inherent functions and properties.
Utility tokens do not fluctuate in value, and are therefore not considered to be investments.
These are a method of transacting within a particular platform or to buy goods or services from their issuing company.
How are Utility Tokens Used?
Utility tokens are used primarily for Initial Coin Offerings (ICO), which became an extremely popular form of investment during 2017-8.
The structure of utility tokens proved highly useful for ICOs, which required a construct for issuance. This is where utility tokens entered the equation.
During a utility token ICO, a given company issues a specific number of tokens that are sold to the community.
This is done across multiple rounds for different prices.
The owners of the token are then granted a specific right in the usage of the company’s products such as being first to access it or getting other privileges.
his approach enables a company to gain funding without jeopardizing its overall independence.
Beyond ICOs, if a blockchain-based company’s team decides to gather funding in some other way, security tokens can instead be used only for powering up the network.
Ultimately, most utility tokens are based on the Ethereum blockchain. It is however possible to build unique utility token using other blockchain platforms.