Blockchain terminology can be quite confusing. Although coins and tokens might seem the same, they have some differences: coins are currencies that are used for trading and payment purposes, while tokens can have more use cases rather than solely payments.

It seems complex to get aware of all the cryptocurrency terms, especially with terminology and meanings that seem confusing at first sight. Tokens are one of the most often used terms when it comes to crypto and blockchain and, in this sense, it is worth understanding its two main types (utility token and security token) in detail and what distinguishes them both.

What Are Utility Tokens?

Utility tokens have a simple concept: as the name implies, it is to be used in a specific platform or project as a medium of exchange. They offer the right to use a product or service.

Utility tokens exist on a wide variety of blockchains and ecosystems, but the main requirement is that the blockchain needs to support smart contracts. This is the reason why the Ethereum chain, which popularized smart contract technology, is still the most common choice among project developers of utility tokens.

This crypto is issued according to the project creators’ ideas, and the way it is used in the ecosystem is entirely up to the founding team. From an investment standpoint, understanding what the token is used for in a project is of extreme relevance. It is often described in the project’s whitepaper or website, in a session called “Tokenomics” (or “Token Utility”).

In theory, if a project has positive network effects and is constantly growing its user base and its token needs to be bought so people can use the product or service, the token price tends to go up.

Examples of Utility Tokens

As mentioned above, these tokens are tailor-made according to each blockchain project or ecosystem, which usually have a well-defined roadmap and a designed utility. Here are some examples of the most popular Utility Tokens:

1. Chiliz (CHZ)

well known, Chiliz is one of the most popular utility token assets. This Utility Token is a payment method within the creator’s platform. It uses ERC-20 technology to work within the Ethereum network.

Users of the creator’s platform can use this token to buy pieces of famous football teams. The entire process is agreed with the teams and their players.

2. Basic Attention Token (BAT)

BAT is a utility token with a promising future. It innovates the way online advertising works, just like WBX. BAT is used to make it possible to buy ads online using it as a payment currency.

3. Smooth Love Potion (SLP)

This is the utility token from the Axie Infinity (AXS) game, which is one of the most famous play-to-earn games. The game works on strategy-based pet battles and, from there, players can earn the SLP tokens as they play.

4. WBX

This token was created by WiBOO with the idea of ​​decentralizing digital advertising. Thus, it is possible to have facilities for advertisers and customers. The platform makes use of the dynamics of social networks to have more views and thus promote its products that can be purchased with WBX.

What Are Security Tokens?

Security tokens are digital assets issued on a blockchain that represent an external asset or company. They are subject to federal securities regulations and may provide holders with certain rights, such as the right to receive dividends or voting rights. Security tokens are intended to be investments, and they are designed to provide holders with an economic return. They are typically issued by companies looking to raise capital through a Security Token Offering (STO).
The ability to offer virtual tokens that represent a company’s shares is extremely innovative in the cryptocurrency market and can be considered a real change in the way tokens are applied.
The legislation on both utility and security tokens is a developing field, and the legal standing of these tokens can change based on their unique qualities and applications.There is not a clear regulation on how to define if a blockchain-based asset is considered a security token, especially according to what the SEC (Securities and Exchange Commission) considers as a token. There were times where projects issued utility tokens that later were considered by regulators as security tokens.

Examples of security tokens

1. EGX

EGX is a Security Token organized by the Gamer Network that aims to represent the management power of the blockchain and make the use of Security Tokens increasing.

2. BCAP

These smart contract Security Tokens are based on the Ethereum network and were originally issued in 2017 by Capital TokenHub. BCAP provides indirect exposure to Blockchain Capital’s venture capital fund, which primarily invests in blockchain and crypto assets.

3. TZROP

TZROP works as a security that provides investors direct exposure to revenue growth, giving quarterly dividends of 10% of tZERO’s adjusted gross revenue. These dividends are paid either in cryptocurrencies or in USD.

4. DIGau

This token was created to bring its buyers exposure within the gemstone and metals industry.

What Is the Difference Between These Tokens?

Although they look similar and sometimes are mistaken even by experienced investors, their primary goals of each token are quite different.

Utility tokens are tied to a specific platform and their main use is to provide users the access to those platform resources, while security tokens are primarily a tokenized representation of an external asset or company.

You can understand those two concepts through analogies that are closer to your reality: a utility token is like a ticket for an event, and if you have it (and use it), you can enter this event and access all areas, lectures and workshops within it.

On the other hand, security tokens represent financial assets and are similar to company shares in the traditional market, where the holder has ownership rights.

In a nutshell, security tokens are intended to be investments, whereas utility tokens frequently have a specific use-case within the ecosystem of the issuing company.

Conclusion

Understanding the conceptual difference between those two types of tokens is essential for an investment decision. Although at first sight cryptocurrencies are merely known as “tokens”, their type is what will determine how they work and how the value generation is held.

For utility tokens, you should always take a deep look into the project and its tokenomics to assess if holding the token could eventually be reasonable based on what it is used for. For security tokens, you should take the traditional finance investment approach: based on its business model, do I intend to own a share of this business?