Utility tokens are one of four types of cryptographic tokens that represent digital units of value on the blockchain.
It’s helpful to think of them as coupons or vouchers. The asset a utility token represents is a certain level of access to a product or service which the holder can gain by redeeming it.
For example, you can exchange filecoins for access to Filecoin’s decentralized digital storage capabilities. Similarly, you can exchange Ether for access to dapps or to execute smart contracts on the Ethereum blockchain.
Some utility tokens also work like reward points.
Brave browser users, for instance, can earn Basic Attention Tokens (BATs) by viewing targeted ads. They can exchange these BATs for premium services on the Brave network.
Utility tokens are often used in initial offerings. Investors get preferential access to products or services in exchange for helping to fund blockchain-based projects. But because they don’t fit the traditional definition of an investment, they’re largely unregulated. And this makes them prone to being exploited by scammers and fraudsters.
Tell-tale signs that an initial offering might be a scam include:
- The developers are anonymous
- Claims that a high profile crypto figure — typically Ethereum’s founder Vitalik Buterin — is involved
- The main sources of publicity are bounty posts or threads — these are posts or threads asking people to spread positive information about the initial offering in exchange for a reward
- Few or vague project details
- Utility tokens are the most common type of cryptographic token, mainly because most of the initial offerings that took place during the initial offering boom of 2017 used utility tokens. Sadly, 46% of projects that made initial offerings in 2017 either didn’t meet their funding targets or didn’t gain traction, so the utility tokens they issued became essentially valueless. It’s estimated that a further 13% of projects that launched initial offerings in 2017 have now ‘semi-failed’.
- ERC-20, which lives on the Ethereum network, is by far the most popular standard for creating utility tokens. As of December 2020, there were 829 projects based on it.
- Because utility tokens give the holder access to a product or service, their value is tied to that product or service’s popularity. This is known as ‘token utility’.
- If more people want to use the product or service, demand for the utility tokens that grant access to that product or service increases. In turn, this makes the utility token more valuable. The opposite is also true. If users lose interest in the product or service, the value of the utility tokens decreases.
Want to know more?
This article by solicitors Michael Jünemann and Johannes Wirtz discusses the legal classification of utility tokens. Interestingly, they argue that, while utility tokens can’t be considered investments, the fact that they can be redeemed for goods or services means they should be subject to consumer protection law.
Brave Browser ran one of the most successful initial offerings of 2017, raising $35 million in 30 seconds. The Basic Attention Token white paper explains their vision to fix the issues inherent in the current digital advertising model, including privacy issues, middlemen, and slowdowns caused by cookies, pixels, and other types of internet trackers.
The METACO view
“While it’s true that many utility tokens are tied to speculative projects, they also have many exciting practical applications. When you boil it down, a token is a string of code. So any token can be hardwired with sophisticated logic that could transform many aspects of our everyday lives for the better — from enhanced security and privacy to democratizing access to highly sought after but scarce resources.”