The term digital currency is commonly used to describe any type of digital asset. However, there are other assets such as utility tokens that are very different from what you would expect from other cryptocurrencies. Functional tokens are a prominent technology in the blockchain world and play an important role in the future Web ecosystem 3 will have. But what exactly are these tokens, what are their features and what are their uses in the crypto world? In the rest of this article, we will try to answer these questions.
We suggest you to read the article “What is a Token” for a better understanding of the concept of functional token.
What are utility tokens?
A utility token, also called a utility token, is one of the types of cryptocurrencies designed to perform a specific function in an ecosystem. Generally, these tokens allow users to perform certain actions on a specific blockchain network or decentralized application.
Unlike cryptocurrencies such as Bitcoin (BTC), utility tokens are not designed to be a real-world medium of exchange. Instead they only have one use case in the respective smart contract protocol.
Most of these tokens are cryptocurrencies such as Bitcoin and Litecoin They cannot be extracted. The development team of these WEB3 projects will issue their tokens to team members, early investors and the general public. Each project can issue its utility tokens on a smart contract blockchain to give users access to new features. For example, the SAND token can be used to buy items in the sandbox game. Functional tokens have monetary value in the open crypto market, but generally cannot be used as a medium of exchange, inflation hedge, or as a store of value. Instead, developers create utility tokens to increase growth and engagement with their community or raise funds for their “dApps”.
Familiarity with utility token applications
Projects and ecosystems that are born in the crypto world may design specific uses for their utility tokens according to their conditions and the services they provide. In the following, we introduce the most important applications of utility tokens.
voting (Voting): Application tokens allow users to vote on future dApp improvement proposals. Technically, if a utility token gives people this privilege, it is known as a sovereign token. While each dApp has different rules for blockchain governance, holding each utility token represents a vote.
Play (Gaming: Many blockchain-based games have functional tokens that can be used to purchase in-game items such as NFTs (Non-Fungible Tokens). Also, these tokens often serve as a reward mechanism in play-to-earn games such as Axie Infinity.
For this purpose, we suggest you read the article What is NFT?
Cryptocurrency exchange privileges (Crypto exchange perks): Some centralized exchanges such as Binance, Kucoin, and Crypto.com offer utility tokens for rewards at discounted trading rates.
reward (Tipping: Utility tokens may act as a dApp’s internal reward mechanism. In addition to rewarding content producers, this function also affects the ranking of comments or videos on their social media homepage.
Payment of network fees (Paying network fees): Users are able to pay for their transactions using a utility token of a smart contract blockchain. For example, people who want to use Polygon’s dApps must have the MATIC token to confirm transactions.
The difference between utility tokens and other tokens
All tokens are created with a specific purpose and use. Tokens that can meet a need and provide useful services with their presence have more chances to be in the capital market. In general, in addition to utility tokens, there are two other categories of tokens in the market that we want to compare.
Comparison of functional tokens and securities tokens
securities tokens, The right to own goods or company shares are given to its holders, but functional tokens are not. A security token is a type of decentralized digital stock and is classified as a security. In addition to a digital asset, the ownership rights that a security token gives to its holders can be like a physical asset such as real estate and anything else tangible. tZero and Blockchain Capital are two examples of well-known security tokens.
Comparison of utility tokens and governance token
The difference between these two types of tokens can be examined from 3 aspects, the first and most important of them Target These are tokens. A sovereign token is granted with the purpose of granting voting rights to its holders. But the utility token is related to rights such as the right to exclusive products, services or experiences in a network related to the same token.
Another difference in terms Value Is. The value of the governance token has a direct relationship with the relevant project, but utility tokens have no direct relationship with the estimated valuation of the company at the time in question.
Eventually, security Sovereignty tokens are more valuable than utility tokens because they have the guarantee of exclusive ownership. Additionally, utility tokens can be offered by cyber profiteers under a fraudulent Initial Coin Offering (ICO).
Introducing the most popular utility tokens
To better understand what sets utility tokens apart from other cryptocurrencies, we’ll take a look at some successful projects below.
SLP Currency, Immortal Potion of Love
SLP cryptocurrency is a native game token Axie Infinity Is. In this game, players can earn SLP tokens for winning battles and completing missions with their monsters called Axie. Also, gamers can use this token to grow or upgrade their NFTs and Oxy.
LINK currency, China Link
The Chainlink project is based on Ethereum and is the largest decentralized blockchain oracle. Anyone who wants to use Oracle Chainlink services must pay the transaction fee with the LINK utility token based on ERC-20. These tokens also act as a reward mechanism for Chainlink node operators.
BNB currency, Binance exchange token
The BNB cryptocurrency, released by the Binance exchange, initially offered Binance users a discount on transaction fees. But now Binance has created its own BNB smart chain, where users can use this cryptocurrency to pay gas fees in applications like PancakeSwap.
BAT currency, Brave’s native token
The BAT token that works with the Brave browser introduces a new advertising revenue model and solves the problem of continuously tracking user behavior. Brio users can get BAT tokens as rewards by viewing ads. In other words, you pay to watch them. There are also other uses for bot currency, for example, it can be used to reward content creators on websites or Twitter.
Are utility tokens suitable for investment?
Choosing a utility token for successful investment depends on the type of project. In general, there are many factors that are effective in the growth of a project. One of these cases is the amount Total supply, Circulating supply And Token release process Is. If the total supply is unlimited or there is still a small portion in circulation, regardless of other factors, the price growth of the token will be more difficult.
Some traders believe that the more uses a token has, the more it will grow, but this is simply not true and the point is something else. The most important factor that determines the value of a utility token is the demand that is created for it, and if the supply is limited, it can increase the price.
utility token; Cryptocurrency with special purposes
In this article, we talked about what functional tokens are and what they are used for, and the reasons why this token is valuable for investment were examined. In general, utility tokens are designed with specific goals for an ecosystem. These tokens do not have legal requirements and are not under the microscope, so they are less secure and some of them may be scam projects. The more capable a project can be in creating attraction and demand for a functional token, the more valuable that token will be. Which utility token do you think has the highest growth potential? Please share your thoughts with us.
What are functional tokens written? Getting to know the types of utility tokens for the first time on the Wallex blog. appeared.
