It can be a hard task navigating through the sea of stubborn waves of technical concepts found in the cryptocurrency sphere.

At your first introduction, you came across various blockchain projects, made some little research and decided to buy into 3 different coins. After the hassle of dealing with exchange, you realize you needed some personal wallets to store each of your crypto. Your purchases comprised of the currently hyped coins namely Bitcoin, Ethereum and Neo. After creating a separate wallet for each coin due to their difference in protocols and networks, you backed them up to a place you dim safe, a confidence sprouted, you now know a thing or two, you are willing to explore and add new candidates to your portfolio.

All this is happening at a time when the whole space is flooded with ICO (initial coin offering), luckily you could manage all these new tokens right in a single Ethereum wallet. You got surprised why these is possible, proceed to make some little more research, your findings gave you the understanding of why some crypto are called coins and some other tokens. You now have a reasonable answer to why a single wallet was able to tolerate all those coins.

Deep down into some other projects to diversify your portfolio you realize the fundamentals of some tokens was to allow participation in it’s network through it use (a good buy you thought), but also found some are just a means to a passive income as they are use to claim a share in a company’s products which is to be purchased under strict terms.

You just came across two type of assets class, where the first is termed utility token as it enable for holders to participate in it’s network while the later one is regarded as a security token as it allow for a claim in a company’s share which sole purpose is to secure you financially through a steady passive income (though with some financial risk).

The cryptocurrency space currently lacks true regulations, a result of which favors a type of token over the other, making the concept of how they are and should be handled somewhat hard to grab for many commoner.

This post will briefly explain each token type “security and utility” and illustrate some of their applications.

 

UTILITY TOKEN

By it’s simple definition and how the name suggest – utility token is a class of token which can be utilize for network participation by all interested individuals/entities who are in possession of such token.

The recent ICO craze also refer to as TGE ‘token generation event’ (substituted in use to avoid being considered as security offerings base on how ICO is derive from IPO ‘initial public offering’ a type of security offering) saw the introduction of many token intended to serve a utility within it’s ecosystem but which may be a security in their actual use, such as this statement made by The Sec chairman Jay Clayton portrayed “I believe every ICO I’ve seen is a security” and these and many more are reasons why US citizens and some few countries are restricted from taking part in ICOs.

Utility tokens sole purpose is to allow an access for participation in an ecosystem and not as an investment tool as oppose to how majority of cryptocurrency investors see them as an investment opportunity.

SECURITY TOKEN

The offering and use of security token in the crypto space is very limited as this stage due to the absence of strict regulations under which they can exist.

Securities according to investopedia

A security is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity’s bond), or rights to ownership as represented by an option.

It can be regarded as an investment tool and so investment are made primarily to maximize profit or serve as an income generating medium.

Security tokens are considered  the way forward by many experts, as by their nature, are more secure for investment due to the existing rules every of their offering and running must abide with.

CONCLUSION

Cryptocurrencies may have seen cycles of booms and dusts, each catalyse by a new introduction. Utility token via the introduction of ICO was responsible for the recent boom of 2017, the next catalyst is still yet unknown and so it is very important for many early adopter to understand the basis of associated components such as how a utility token should be considered as compared to how a security token functions for more better decisions technologically and financially.

What do you think the future holds for both utility and security tokens, which do you think will survive in the end? I will like to hear your opinion in the comment box below.

 

 

Images credits : pixabay.com

Useful Reference

https://espeoblockchain.com/blog/security-token-utility/

https://strategiccoin.com/difference-utility-tokens-equity-tokens/

 

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Responses

  1. crpp

    I’m hearing that STO’s might be the future of the space. I don’t know. Obviously many ICO’s from this year are scams and will die. I think some of utility tokens will survive. You just really need to think if the token itself brings value and if the company ‘needs’ to tokenize their service or they just did it to raise money.
    What your opinion on that, who will be the “winner” security or utility tokens.

    Anyways, I liked the article, you got my follow 🙂

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  2. CryptosDecrypted

    Thanks for the informative post @paulo380. I view STO’s with a degree of skepticism not in and of themselves but because just like ICO’s the vast majority of them will fail to deliver value to their investors. I will, however, keep an eye out for the good ones! Cheers.

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    1. Paul Oluwanisola Post author

      I agree partly with you. That is why is it always good to analyze the fundamentals and value generating mechanism of a token before investing any sum.
      My main concern is weather we could see the good time again. So much pain right now.

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