Security tokens vs utility tokens

There are many different roles that tokens play in crypto. Some are used in payments (like BTC), while others are used as governance tokens (like UNI). However, the two most common categories are security tokens and utility tokens. Getting to know the difference between the two allows you to understand the intended purpose of the crypto you plan on trading, and therefore make better, informed decisions. 

Security tokens

Security tokens are digital assets that represent ownership of traditional investment. This can be company shares, real estate, commodities like gold or oil, luxury items, etc. This happens through the process of tokenization, which converts these hard to access investments into digital tokens that can be easily owned and traded on a blockchain.

Because security tokens are similar to traditional investments like stocks and bonds, they fall under strict regulatory and compliance requirements. Companies issuing them may need to register with regulators, provide detailed disclosures about the assets backing the tokens, and in some cases only sell them to qualified investors.

While this makes security tokens more complex to launch, in practice, this layer of legal measures provides protection for investors, ensures transparency and prevents fraud.

Utility tokens

Utility tokens are widely used across crypto projects, as they give access to products and services within a blockchain.

An example of a utility token is ETH, which is used to pay transaction fees (known as “gas fees”), and access decentralized applications on the Ethereum network. Another function of utility tokens is using them in voting to make decisions on the blockchain (a process known as DAO).

Utility tokens function like a “key” to use certain features, pay fees, or unlock the benefits of blockchain projects. So, the risks surrounding utility tokens are primarily tied to the success of these projects. As usual, approach them with enough knowledge to be able to navigate them safely.