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There is no doubt that blockchain is creating prominent disruptions throughout almost all industries that are presently existing. Blockchain technology makes it efficient to formulate a broad range of new business structures. Blockchain is ascribed as being the only technology since the internet was discovered that brings in valuable innovations like trustless networks and decentralization. The usage of tokens is among the significant factors that contribute to the success of this technology. So today we will have a look at a comparison of utility tokens vs security tokens.
This article will also delve deep into the idea of tokens and will help you to get a clear picture of the difference between utility tokens vs security tokens. Without any further delay let us begin.
Understanding The Idea Of Tokens
A token may simply imply any given digital currency token or a token that prevails on another crypto’s blockchain in cryptocurrency and computer security. A token is an asset, utility, or the unit of value that is issued by an entity. Tokens portray programmable assets or access rights that are handled via a smart contract and a defining distributed ledger.
These tokens are issued when an entity releases an ICO (Initial Coin Offerings), which is more or less similar to IPO (Initial Public Offerings). The primary difference between an IPO and an ICO is the fact that an ICO gets the stock in exchange for the investments that you will make, whereas in the case of an ICO, you will get a token when you make an investment. These tokens can be redeemed to avail of the product or service of the company in the future.
Utility Tokens Vs Security Tokens: An Overview
As the globe becomes more accustomed to digital currencies and blockchain technology, the question that many nations are struggling to address is whether a token can and should be classified as a security. The path between utility tokens and security tokens is not very clear. To evaluate whether a token is a utility token or a security token, we need to do this comparison of utility tokens vs security tokens. But before that let us have a look at what these tokens imply individually.
What Is A Security Token?
“Security tokens” should really be termed as “securities tokens,” since they are often tied to a securities offering. The securities in question are generally a share in the entity that issues the token as a form of investment in the longer-term growth of the technology company. They are regulated just like securities you would find in more traditional industries.
A crucial characteristic of most security tokens is the right to have some type of say in what occurs with the company that issued them. When you purchase a security token, you generally become a prominent shareholder, and the money you invest is directly affected by the value of the company itself. This is varied in comparison to a crypto coin, where the value is related to the demand for a specific coin and the confidence others hold in the platform. The security tokens list includes INX, SPiCE, Blockchain Capital, Science Blockchain, and many more.
What Is A Utility Token?
Even though a security token is a type of security, other tokens are generally not. Utility tokens are the ones that are most commonly issued during an ICO. Rather than portraying an ownership stake in the real company, they are more like golden tickets. They offer holders the access to preferential treatment and special services like discounts to launch a special startup line. The item might be a software package or even software as a service platform, for instance. In this respect, many wonders if is Ethereum a utility token? The ERC-20 standard is the most common form of utility token using it, businesses construct decentralized apps on the Ethereum blockchain and release ICOs using the tokens.
As they are far more like promotional tools and do not offer an ownership stake in the business, utility tokens are not considered as an investment vehicle. They can grow in value if what your tokens portray suddenly becomes famous and in demand. For instance, if your token portrays a limited pass of access, those that have not been cashed off yet might increase prominently in value among those who missed the ICOs. The utility tokens list includes cryptos like BAT (Basic Attention Token), Golem, and many more. And these are quite successful utility tokens.
Utility Tokens Vs Security Tokens: The Difference
This comparison of utility tokens vs security tokens can be done on the basis of these parameters. So without any further delays, let us begin with this article.
Purpose
A security token is an investment vehicle that illustrates the legal ownership of a digital or physical asset that has been verified within the blockchain. Utility tokens help in funding ICOs and formulate an internal economy with the blockchain of the project. The consumers who hold a utility token will also have several voting rights within the ecosystem.
Expectation
In a security token, the value of the entity is directly linked to the valuation of the company. More valuable the business, the more valuable the token. In a utility token, there is no connection between the present state of the valuation of the company and the value of the token.
Scam Potential
The probability of a scam is minimal in a security token as it is highly regulated. On the contrary, utility tokens are highly unregulated, and so scammers are known to formulate bogus tokens and ICOs to earn quick money.
Regulation Status
It is very difficult to create regulations for the ICOs as utility tokens are comparatively non-regulated. On the contrary, in the case of security tokens, the investor and company are required to get through the Howey test.
Wrapping Up
Hope this article has helped you to evaluate the difference between utility tokens vs security tokens in the crypto space. This article concludes that one helps in incentivizing holders to act in a specific way while the other is a contract that represents the legal ownership of an asset. But in comparison to these two, security tokens are thought safer in comparison to utility tokens. We have also mentioned some of the security and utility tokens examples.
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