Difference Between Utility Token And Security Token. Although cryptocurrencies are mostly considered the same by people, that is not correct. Just as
Difference Between Utility Token And Security Token.
Although cryptocurrencies are mostly considered the same by people, that is not correct. Just as there are different types of smartphones out there, there are different types of cryptocurrencies as well. In that way, cryptocurrencies are more of a technology. The first one was, of course, bitcoin. It inspired the development of many other cryptos (altcoins). So, after more than a decade of bitcoin’s introduction, there are thousands of crypto. Some are considered as a Utility Token or a Security Token.
Cryptocurrencies have also given rise to tokens. These are cryptos that are built on the network of other cryptos. They don’t have their underlying DLT or blockchain infrastructure. There are many types of tokens in the crypto ecosystem. However, the two main ones are utility token and security token. It is important to understand each and the differences between them. They are going to be very important in the future.
What is a Utility Token
Utility tokens are basically user tokens. The concept of such digital tokens has existed before blockchain was invented. But, it was blockchain technology that has allowed them to flourish. Many developers of the world have created utility tokens for a number of purposes.
These tokens are usually given out by the development team during the crowd sale of their project. Utility tokens may or may not have a monetary value. They provide users with specific rights on the network. These rights can be of different natures. It can be discounted fees, special access to a product/service, voting rights, etc.
What is a Security Token
Security tokens are those tokens that derive their value from an external tradable asset. Since tradable assets are involved, security tokens are subject to security laws. Security tokens are more of an investment. As such, investors expect a profit on their investment.
Security tokens are a really powerful innovation. They have tremendous useful purposes. In the coming years, they can change how investments are done. As an example, most people may not be able to afford a gold bar. However, with security tokens, a large group of people can own fractions of the same gold bar.
Crypto proponents believe that in the future, most assets will be tokenized.
Differences Between Utility and Security Token
The main differences between utility and security tokens on various grounds are as follows:
Utility token are created to fund ICOs and create an internal mechanism within the blockchain. Security token are investment contracts representing external tradable assets that are verified on the blockchain.
Utility token are mostly unregulated. They provide a variety of use cases and are, therefore, difficult to regulate. Most countries classify security tokens as securities and the appropriate laws apply.
Utility token value doesn’t depend on the state of the project’s development or its valuation. Security token derive their value from external assets. Higher the value of those assets, higher the value of those security tokens.
4. Scam Potential
Utility token are more or less unregulated and so, scammers use fake utility tokens very commonly. Security token are heavily regulated and are less likely to be used by scammers.
Also read: Signs Of Bitcoin Pump and Dump Scams