Utility tokens are a fusion of “utility” and “token.” By dictionary definition, the former means the ability to satisfy a particular need, while the latter is a voucher that can be exchanged for goods and services. Combining the two words instantly conveys the concept behind utility tokens as they apply to the cryptocurrency industry. In this piece, beyond definitions, you’ll learn how utility tokens work and how to use them.
What are utility tokens?
In cryptocurrency speak, utility tokens provide access to specific products or services within a decentralised network or ecosystem. They’re best viewed as a key that unlocks value or enables interaction within a particular blockchain environment, rather than an investment avenue.
Utility tokens are created on smart contracts, which are self-executing programs that execute actions once a condition is triggered. A typical example of a utility token is Crane Coins (CNC) on the Crane app. CNC is available for airtime purchase, data subscriptions, and cash trade-in. Other examples of utility tokens are listed below:
- Ethereum
- Binance Coin (BNB)
- Ether
- Filecoin
- Chainlink
- Uniswap
Types of utility tokens
In terms of usage, utility tokens fit the following categories:
1. Governance tokens
It empowers holders to participate in the decision-making process of a blockchain platform. Governance tokens are impactful on Decentralised Autonomous Organisations (DAOs), a community-driven initiative where members contribute to company decisions. For example, Uniswap’s UNI governance token is hosted on the ERC-20 network, allowing holders to propose and vote on changes to the Uniswap protocol.
2. Payment tokens
Think of them as spending digital cash on a specific blockchain platform. Payment tokens provide value transfer and facilitate crypto trading and usage. Binance Coin (BNB), which is used to pay transaction fees on the Binance exchange platform, is a prime example of a payment utility token.
3. Reward or incentive utility tokens
Decentralized financial (DeFi) systems offer incentive tokens to encourage participation and contributions to a network. Rewards can be attached to activities such as completing an action, staking, or playing a game.
For instance, CNC is a reward/incentive token that you win after completing the following actions on the Crane app:
- Complete transactions on Crane.
- Unlock a new badge or level on the Crane app.
- Refer your friends to join Crane.
- Complete Know Your Customer (KYC) registration.
- Rank high on the leaderboard.
4. Service fee tokens
They’re used to pay for protocol or network fees and operating costs. An example is Ether, the native cryptocurrency on the Ethereum blockchain used to pay gas fees. Similarly, BNB is used to pay transaction fees on the Binance network, while advertisers on the Brave browser use Basic Attention Token (BAT) to pay for ad space, earn Brave rewards, and tip content creators.
5. Access tokens
Technically, utility tokens grant “access” to products or services. Access tokens, however, are digital keys or subscriptions that unlock unique functionalities on a platform.
For instance, creators on the Render Network use the RNDR token to access decentralised Graphics Processing Unit (GPU) services. They also earn RNDR tokens for supplying compute power.
The table below summarises utility token categories based on usage and their use cases.
| Payment | Use case | Example (s) |
| Governance | It grants users decision rights in a community. | Uniswap |
| Payement | They’re used as digital cash to buy goods and services | BNB |
| Reward | Given as an incentive for participating in set activities. | CNC |
| Service fee | Used to pay for network or transaction fees | Ether and BNB |
Utility tokens vs security tokens: Are they the same?
It’s not uncommon to mistake security tokens for utility tokens and vice versa. So, if you’re wondering if they’re the same, the answer is no, they aren’t.
Think of security tokens as a symbol of investment. They’re digital assets that represent ownership or shares in real-world assets, such as equity, debt, real estate, or an enterprise. Security token ownership grants you access to profits and dividends. As a result, federal agencies, such as the SEC, regulate security tokens and are subject to additional risks and market fluctuations.
| Aspect | Utility tokens | Security token |
| Primary purpose | To provide access to a product, service, or feature within a blockchain environment | A symbol of ownership or shares in an enterprise. |
| Regulation | Loosely regulated | Strictly regulated. Typically subject to SEC monitoring and other financial regulation requirements |
| Underlying asset | Usually not backed by any tangible asset. | Tied to real-world assets, such as financial instruments and real estate. |
| Valuation basis | Driven by the demand and supply of the issuing platform. | Depends on the performance or valuation of the underlying asset or enterprise it represents. |
| Trading environment | Often available on specific exchanges and networks with limited liquidity. | Traded on regulated markets with greater liquidity and transparency |
| Risk profile for investment | High risk for investments because of poor regulation. | Fitting for crypto investments because it’s subject to regulation and compliance. |
| Examples | CNC, BNB, ether | INX token and TZROP |
Are utility tokens the same as stablecoins?
Utility tokens and stablecoins are blockchain-based digital assets. They’re fungible and transferable, meaning you can exchange them on crypto exchanges or use them for payments on supported platforms.
Despite their similarities, a utility token isn’t the same as a stablecoin. Tokens are tied to a specific ecosystem, while stablecoins support multiple blockchain networks and standards.
Another distinction between the two is the regulations under which they’re subjected. Financial regulators, such as the Securities and Exchange Commission (SEC), typically oversee stablecoin activities to manage their volatility and availability. In contrast, utility tokens are largely unregulated. As a result, stablecoin prices are relatively stable and safer for investments, while the value of utility tokens heavily depends on the adoption (or lack of) of their platforms.
The backing mechanism is another difference between the digital assets. Utility token supply and demand rules are dynamic and irredeemable for real-world currencies, such as dollars and naira. Stablecoins, on the other hand, can be pegged to local currencies, gold, or crypto and redeemed for physical cash.
Utility token vs stablecoins: An overview of their similarities and differences
| Metric | Utility tokens | Stablecoins |
| Price volatility | It varies. It depends on the demand and supply of the platform it’s attached to. | Stable |
| Backing | None. The value depends on usage. | It’s backed by assets such as fiat, crypto, or gold. |
| Regulation | Generally unregulated. | Highly regulated. |
| Investment appeal | Subjective. Rewards depend on platform adoption. | Low risk/medium reward. |
| Use case | Access to specific services or used as a reward within a community. | Medium of exchange, store of value, and crypto remittance. |
| Underlying technology | Built on the Blockchain | Blockchain-based. |
