Utility Token Meaning

Dec 23, 2022 | Updated Mar 27, 2024

A utility token, also known as a ‘user token’, serves a specific function that gives holders access to features of a decentralized application or ecosystem and forms the economy of that system.

What is a Utility Token?

Utility tokens are commonly issued during Initial Coin Offerings (ICOs) or Initial Dex Offerings (IDOs). Utility token holders enjoy certain privileges in exchange for their purchase, such as access to specific services or discounted fees. Alternatively, a utility token holder could vote on the improvement proposal of an upcoming decentralized application (dApp). The most widely used token standard (or template) for utility tokens is the ERC-20 token standard developed on the Ethereum network.

Examples of Utility Tokens

A utility token serves certain functions within its respective cryptocurrency network. Here are a few examples:

Basic Attention Token (BAT)

It is an ERC-20 token that is used by advertisers as a means of payment for different services on the Brave browser. Users can earn BAT rewards for watching advertisements buy BAT, and sell them on decentralized exchanges.

Chainlink (LINK)

Chainlink is a blockchain oracle that is built on the Ethereum network. An oracle is a service that connects a blockchain to external sources to input real-time data. LINK is an ERC-20 token and the utility token of the Chainlink oracle network. LINK rewards network operators for retrieving data and various other services, making it the lifeblood of that application.

Utility Tokens vs Security Tokens – What is the Difference?

Security tokens serve as an investment vehicle which are tied to a real-world asset and give its holder ownership access to that asset. Utility tokens are designed mainly to serve specific functions and for interaction within the blockchain ecosystem. They do not denote any ownership of the project.

On the other hand, security tokens demonstrate ownership, partial ownership, or shares of an asset or project, similar to traditional security assets like stocks.

The key differences between utility tokens and security tokens include:

Usage: Security tokens are investment contracts that represent a share in the company or entity that is issuing the token. In contrast, utility token holders do not have an actual stake in the company and will not generate any return on investments.
Valuation: The value of security tokens is directly related to the valuation of the company or the asset issuing the token. If the company’s valuation increases, so does the value of the security token. There is no connection between the asset’s current valuation and utility tokens.
Regulation: Utility tokens are largely unregulated. For security tokens, companies and investors must comply with regulations and federal laws, such as the Howey Test in the U.S., which determines if there is an investment contract and whether the token is used for investments with expectations for returns.