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What Is a Utility Token? A Comprehensive Guide

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What is A Utility Token?

Utility token has emerged as a vital tool for raising capital and financing crypto projects.

Another key reason for the popularity of the crypto coin is its diversified uses for various kinds of businesses and other stakeholders. 

While the traditional investing market typically lacks diversification and utility, the crypto market provides it all to investors and businesses. 

However, if you are new to the digital investing world, it is essential to understand the subject’s basic meaning and concepts to avoid any future risks.

This guide will help you understand what a utility coin is, what benefits it reaps, and which currency tokens are best to invest your money in.

Let’s begin!

Definition Of Utility Token

A utility coin is defined as a particular type of crypto asset that works on smart contract blockchain that serves a special purpose of fund development of a particular cryptocurrency.

They are distributed among the crypto investors during the initial coin offering to develop an interest in a particular product or service.  

These currency tokens hold a monetary value but cannot be used as a medium exchange like Bitcoin or Ethereum. However, investors can use them as a medium of swap on the blockchain network to buy a particular service of budding cryptocurrencies.

This type of crypto coin also lets users perform various actions, including voting, fee payment, and participating in proof of consensus stake.

Developers define this token as one of most efficient sources to increase awareness and engagement for their decentralized applications.

Roles Of Utility Tokens

Here are the key benefits of a utility token:

  • Promotes new cryptocurrencies: Utility tokens are distributed among new investors to increase awareness and promote a particular exchange, project, or business.

  • Grants easy access: They provide easy access to the users for a service or product for the concerned decentralized application. 

  • Provides governing rights: A crypto token gives the users the power of decision-making within a decentralized network. Investors get the right to vote in crucial choices of a network.

  • Acts as a fundraiser: During the development of a Dapp, project, or dex, utility tokens are used as capital for ICO and IEO mechanisms.

  • Protects a platform from harmful activities: These utility tokens have the ability to verify, identify and slash rewards for the malicious nodes.

  • Acts as a payment method: These tokens act as a method of paying the transactional fee on the order or sale of stock. Many crypto exchanges even provide discounts on crypto trading fees when paid through native tokens.

What Are The Primary Uses Of Utility Tokens?

Here are the areas of scope where a crypto asset can primarily be used:

  • Voting: A utility coin serves owners the right to vote on a particular decentralized app or protocol. In this case, a digital coin is also a governance token, as the users get to participate in the decision-making process of various cryptocurrencies and blockchain networks. It generally includes voting on the improvement of a project, hiring a new team member, or on a new crypto project proposal.

  • Farming: Yield farming helps the platform users to earn rewards by staking their money and contributing to the network’s liquidity. 
  • Staking: A utility index can be used to earn rewards or interest by depositing the coin as a stake. It is an ongoing process of passive earning where investors can earn rewards by purchasing one or more crypto tokens.

  • Tipping: Crypto tokens are often used to tip on the decentralized apps to promote the network. This feature of a utility index is also designed for influencers who help improve the social ranking and reach of the particular network’s social media handles.

  • Paying Fees: They are commonly used to pay gas fees levied on investors on a particular blockchain. These are also used for the payment of various internal services and products. For instance, in the web3 gaming ecosystem, the utility tokens used for transactions and interactions are SAND and AXIE.

  • Gaming: Many web3 games offer digital tokens to the players that can further be used to purchase in-game items. They can also be earned as rewards in the games that work on the play-to-earn formula.

  • Coin Exchange Rewards: Many top crypto exchanges, like Binance, offer cryptocurrencies and utility tokens as perks to reduce crypto trading fees.

The Utility Token And Its Use In ICOs And IEOs

A utility token is one of the top sources of capitalizing and financing through ICO and IEO. However, the use of these coins in both cases slightly differs.

Here is how a utility coin is used in both the cases:

  • ICO: Utility tokens are popularly used for ICOs because they can be used as a medium of exchange to purchase a particular digital asset. They are also used as rewards for the early investors to promote a specific project or action of a crypto project in the ecosystem.

  • IEO: In the case of an initial exchange offering, digital tokens are used as an investment. In this event, the digital assets are sold by businesses using a crypto exchange to raise capital. A crypto token ensures transparency and security for IEO stakeholders.

How Do Utility Tokens Work?

Here is how a utility coin works:

  • Using blockchain technology, the utility coin acts as a source of defining smart contracts, peer-to-peer transactions, bonuses, and profit sharing.
  • They allow you to perform various actions, such as purchasing a product or enrolling in a program within a decentralized exchange.
  • The value of a crypto token rises when there is an abundance of requests for a product or service in the digital ecosystem and vice versa.
  • One of the key functions of a utility coin is to provide reward or interest to early investors and other decentralized software lenders.
  • Another way to use digital tokens is to raise capital for various events, including ICO and IEO.

What To Know Before Investing In Utility Tokens

A utility coin holds a lot of potential when it comes to earning profits and rewards for investors. It is a good option for startups and businesses to raise capital.

However, with pros comes cons as well. With so many opportunities and profitability comes little risk. There have been times that have caused credibility issues for new cryptocurrencies and projects.

Since a governing body does not regulate a utility token, it becomes essential for the crypto coin holders to measure all the outcomes and risks involved with it.

Here is what you need to be careful of before investing in a utility index:

  • The utility token’s value is improved through the demand and supply of the requests. No set or natural method improves the taken value.
  • If a project fails to be profitable, the index value decreases significantly.
  • If a project fails to raise sufficient funds and capital, a liquidity problem arises in the ecosystem.
  • Digital tokens do not promote the adoption of cryptocurrencies and are more focused on delivering perks and rewards.
  • The decision-making power is limited.

Examples Of Utility Tokens

Here are the top 8 utility token examples which are considered best to invest money in:

1- Damex (Damex.io)

Established in 2017, Damex.io is a decentralized payment platform that promotes and assists in purchasing, managing, storing, and selling digital assets within the cryptocurrency ecosystem.

Damex.io recently announced its native token, Damex, which will be used to reward and incentivize platform users. The index is yet to be launched in April 2023.

The currency token holders will get the voting and governing right for the key features of the platform, including coin listings and application features. Additionally, users will be able to suggest comments for the platform via various surveys.

The token is backed by top companies including Cetacean, Odin Capital, Funfair Ventures, Coin IX, Alpha Praetorian Capital, Belobaba, and Catenam.

Damex.io is fully regulated, authorized and issued under MODUlR Finance, registered by FCA, which encourages Damex to issue IBANS and sort codes to the stakeholders within the system.

2- MANA (Decentraland)

MANA is a native NFT token of Decentraland that acts as a medium of exchange to pay for goods and offerings in the virtual world of this famous NFT platform.

Decentraland’s every item, including land, wearables, and accessories, is priced in the form of MANA.

The coin is available on a wide range of crypto exchanges, including Coinbase, Crypto.com, and Gemini.

3- MATIC (Polygon)

MATIC is the in-house currency of Polygon technology that enables cryptocurrency investors and stakeholders to interact with various dApps in the cryptoeconomics.

This coin has a wide range of use cases, including privileged rights of participation in voting on Polygon Improvement Proposals, payment of gas fees, and contribution to security leveraging staking.

This crypto index is available on various leading crypto exchanges, including Binance, Coinbase, Poloniex, and Uniswap.

4- Verse (Bitcoin.com)

The verse is the in-built utility coin of Bitcoin.com. This token promotes and focuses majorly on providing incentives and rewards to the users.  

It facilitates a wide range of activities including buying, selling, and swapping. All the transactions made on Bitcoin.com are eligible to earn rewards in form on Verse coins.

This currency token allows users to participate in a wide range of activities, including crypto trading, yield, farming, staking, and payment in the metaverse. 

5- BNB (Binance Coin)

BNB, a native coin launched by the Binance exchange, is one of the world’s most popular utility tokens that enables payment of goods and services in the Binance cryptographic system.

It facilitates transaction fee settlement and lets users participate in coin sales. This coin is currently serving various decentralized areas, including payment, travel, entertainment, finance, and service.

6- Chainlink (LINK)

The LINK is an ERC-20 utility index of Chainlink that facilitates payments on the Oracle network. They help compensate the node operators for their on the blockchain ecosystem.

In this network, the rewards are applicable in the form of LINK for various utilities, including retrieving data from the blockchain and sending it to the developers.

It is available on the majority of exchanges including Crypto.com, Coinbase, Binance, Bithumb, AirSwap, Ether Delta, IDEX, and COSS.

7- Basic Attention Token (BAT)

BAT, or basic attention token, is a leading crypto token that allows users to earn significant rewards using or even watching ads on the Brave web browser.

This crypto index is based on Ethereum and continuously tracks the time and attention of the browser users. Creating this coin, developers aim to distribute marketing money efficiently among marketers, readers, and website users.  

BAT is available on many decentralized platforms, including Coinbase, Crypto.com, and Binance.

Conclusion 

As a beginner in the world of cryptocurrencies and digital investment industry, it can be a little too much for you to understand everything at once, especially an elaborative topic of a utility token.

I have covered almost all the elements related to the utility index that can help you gain insights for your next coin investments. You can now easily measure the positive and negative outcomes of investing in various cryptocurrencies and utility tokens.

With a clear understanding of the use cases and importance of utility tokens, it comes time when you want to actually consider investing in a digital coin.

Consider any of the above-listed utility tokens to reap high benefits in the form of rewards and incentives in the crypto ecosystem.