747
views

Security Tokens vs. Utility Tokens – A Beginner’s Guide

One Platform, Many Functions

Blockchain, the pinnacle of decentralized, distributed, and transparent technology, is at its base a Platform. What is a Platform, you ask? A technological sense platform is a nurturing ground for growing and building applications that serve various purposes.

Being a platform, blockchain can be used for a variety of purposes. With a general-purpose technology as blockchain, there is no limit to what innovations can be made.

One such variety seen in the blockchain projects that come up today is the distinction in their native tokens. A token is a cryptographically linked piece of value issued by the project members. The use of a token can be anything from a medium of exchange to a piece of share in the project.

A token is a utility, an asset, or a unit of value issued by a company. In most cases, tokens are issued when a company launches an ICO/IEO/STO or any other token sale — that works more or less like an initial public offering (IPO). Over the years, the market has evolved several types of tokenized digital assets, each with their own properties.

The major classifications that we see today are Security tokens and Utility tokens.

Security Tokens

Security tokens derive their value from an external, tradable asset, such as stocks or real estate. If you buy a tokenized stock version, you will acquire the same rights you would get when you buy stock via a traditional stockbroker – profit share and voting rights. The only difference is that a token comes in digital form.

The major distinction to utility tokens is that security tokens are designed to be investments. Thus, they fall under the same regulatory oversight as other investment products. They are considered by many to be the key to cryptocurrencies achieving mainstream adoption due to their focus on tokenizing digital and non-digital assets, making them useful for almost any industry or application.

A security token is essentially an investment contract that represents legal ownership (as recognized by the SEC) of a physical or digital asset (like real estate, artwork, or ETFs) that has been verified on the blockchain. Security Token Offerings, more commonly known as STOs, have been gaining major interest over the past year. They mirror many qualities of the traditional stock market with the added advantage of being issued on a blockchain.

Important Characteristics

A Security Token, i.e., a token with attached rights and responsibilities, can have all of the following characteristics,

  • Access to multiple asset classes
  • Access to liquidity for traditionally illiquid assets
  • Access to a global network of investors
  • Dividend payouts

Major Security Tokens

Utility Tokens

A utility token has a wider functionality than a regular token like Dogecoin. Utility tokens do have value, but they cannot be considered money as straightforward as a coin. Utility tokens can provide value to investors in different ways. They give users access to a future product or service. Utility tokens are currently the most popular form of tokens.

Utility tokens were easily the most popular form of token issuance mechanism adopted during the 2017 ICO boom and later. The major reason was that utility tokens allowed projects to crowdfund their ideas without diluting the projects’ ownership. According to SEC Director of Corporation Finance William Hinman, a true “utility token” in the sense that many crypto investors seem to have in mind is probably best represented by Bitcoin itself: as he said at the Yahoo Finance All Markets Summit.

Important Characteristics

  • An incentive-based tool to drive human behavior in any network
  • Usually do not carry ownership or membership rights.
  • Used as part of the wide ecosystem
  • Can be used as an alternative for mediums of exchange
  • Can help in the evolution of internal network-based markets

Major Utility Tokens

Conclusion

As of now, there isn’t a clear-cut set of guidelines for what means what. In this nascent and evolving market, regulations and guidelines are of the utmost importance, for the novel reason that we do not know how to treat these different assets. Many experts like to point to the Howey Test (a set of sufficient conditions required for a given asset to be considered security), which sets guidelines for classifying an asset as a security. Still, the criticisms remain that it is an old guideline, made specifically for traditional assets such as stocks and real estate and so on.

For now, we can only use the traditional rules to make new classifications, as we have done above. But as new market strategies are developed, we will see better sets of rules to make better decisions.

Bitcoin live price
Btc
Bitcoin
$19.269,97
price
0.55914%
price change
BUY NOW

As a side note, keep in mind that Blockchain technology general-purpose does not limit it to any form of innovation. We can see more varieties of tokenized assets in the future, some in a hybrid form, some issuing different types of tokens under one roof, and even come packaged in a way never before seen.

Stay up to date with our latest articles

More posts

Here are the Benefits of Auditing Your Smart Contract with SolidProof

Auditing a smart contract is vital to ensure that the code functions as intended. SolidProof offers a wide range of services to help with this process. The company guarantees a sound audit process and an experienced team of auditors.  Here are the benefits of auditing a smart contract with a reputable company such as SolidProof: A wide range of services: SolidProof offers a wide range of services to help with the audit process, including code review, security analysis, and more.…

Smart Contracts Vulnerabilities Specific to The DeFi Space

As the financial world moves increasingly online, it's becoming more and more essential to ensure that all transactions run securely. One way this is possible is through the use of smart contracts.  Smart contracts are computer programs that automatically execute the terms of a contract. They provide a secure way to conduct transactions without relying on third-party intermediaries.  While the use of smart contracts offers many advantages, they are also vulnerable to attack. In this blog, we will explore how…

Malicious Attacks on Smart Contracts that Auditors Can Easily Identify

With many businesses adopting blockchain technology and Smart Contracts, offering reliable security audits in the industry has become increasingly important.  Businesses may protect their assets and contracts by recognizing and preventing harmful assaults. This blog post will explore the different attacks a group of criminals can carry on Smart Contracts. We'll also look at real-world instances of assaults to help you secure your contracts. What are Smart Contracts? Understanding the Benefits of This Technology What are smart contracts? They are…

How Smart Contract Audit Can Help Prevent Hacks

As companies move toward implementing smart contracts, the need for technical audits becomes increasingly essential. Having a third-party auditor check your contracts for vulnerabilities can prevent your company from suffering from a hacking attack.  What are Smart Contracts? A smart contract is a script that automatically carries out a contract's provisions. Smart contracts are self-executing, meaning that once the system verifies the meeting of pre-determined conditions, the contract will automatically execute. This eliminates the need for intermediaries such as lawyers…

Top 10 Ways to Earn Free Bitcoin in 2022

Here are the best ways to earn free Bitcoin when your purse is light. --- Are you interested in Bitcoin, but still hesitant to risk putting money towards it? Alternatively, are you looking to sat every sat possible, but lack the dry powder to buy more? Here’s a secret: you can put more bitcoin in your pocket without spending a dime – or even doing any real work.  That’s not to say you’ll earn much bitcoin without either of those…

Are Gold-Backed Tokens Worth Investing During Crypto Bear Market?

The crypto market is under the complete control of bears, investors taking short positions to profit from declining prices. In this unstable environment, new capitalists are fearful or skeptical when funding projects. Instead, they turn to more reliable assets that would not wipe out their portfolios when or if they flop. Gold-backed tokens represent a category of assets ready to provide portfolio stability and allow investors to overcome the bear market without too many losses. On the contrary, gold-pegged tokens…

What is Taro? Trading Assets and Currencies on Bitcoin

Taro leverages Bitcoin, lightning, and Taproot to enable the peer-to-peer transfer of currencies and assets beyond just BTC. —  Worried that Bitcoin is too boring to play within the growing digital asset economy? Fret no longer.  Using Taro, the original blockchain network can support the decentralized exchange of multiple assets – including fiat currencies. Moreover, the protocol works together with the lightning network, letting users transact – instantly and for free – with non-BTC-denominated balances.  Read below to learn about…

What is Fedimint? The Custody Solution to Bitcoin Privacy

Fedimint combines distributed custody with blind-signed ecash tokens to let Bitcoin users transact in private. --- Despite its growth, Bitcoin still faces some glaring limitations to reaching mass adoption as a fully censorship-proof payments network. One of them is privacy. Bitcoin’s ledger is fully open and public, meaning anyone can track another person’s transactions if they know his public address.  The other is a custody problem. While wallet software UX has improved considerably over time, many Bitcoin holders still store…

What Is a Crypto Bear Trap?

Cryptocurrencies are often incredibly volatile and can see massive price swings in a short time.  This makes them ripe for bear traps. A bear trap is a situation where traders wrongly think a coin is about to reverse a downtrend. These events often result in significant losses.  This guide will discuss crypto bear traps, how to identify them, and the risks involved in these situations. Introducing Crypto Bear Traps A bear trap happens when a trader buys assets, expecting the…

Understanding the GameFi Phenomenon

The GameFi industry is changing the way people think about gaming and finance. It provides a new way for gamers to interact with each other and earn money. It is also giving people a new way to invest their money.  The GameFi industry has the potential to change the way these industries operate. This guide will look more closely into this new business, covering several features. What Is the GameFi Sector? The GameFi sector is a crypto-based industry that uses…