Cryptocurrency beginners often think of tokens as being homogenous. However, not all tokens fall in the same category. Once you understand the types of cryptocurrency tokens, you can easily invest smartly and earn more profits. Tokens are classified into two types: security and utility.
Let’s explore the difference between these two different cryptocurrency tokens.
What Is a Utility Token?
The digital assets that are created by cryptocurrency startups to power their blockchain-based systems are called utility tokens. Filecoin is known for forwarding payments to those users who offer space to store data for their network.
These tokens are leveraged by cryptocurrency startups to execute certain actions in an ecosystem. This same ecosystem is where the users can receive compensation in the form of lucrative incentive schemes. Utility tokens target the human psychology to earn rewards. The use of incentivization has opened up several possibilities.
The ERC20 standard is the most popular example of utility tokens. A wide range of companies are creating their decentralized application infrastructure on the foundations of these ERC20 tokens.
According to Jeremy Epstein, who serves as the CEO at Never Stop Marketing, utility tokens offer the following privileges to users who invest in them.
- The privilege to utilize the cryptocurrency networks.
- The ability to vote in the network.
What Is a Security Token?
Some people credit security tokens as an important piece of the puzzle to take the cryptocurrency boom to unprecedented heights. A security token is a type of investment contract which is used to represent the legal ownership (approved by the SEC) of a digital or physical asset. This asset is verified by the blockchain.
Through a smart contact, it is possible for investors to exchange security tokens with cryptocurrencies and fiat money.
The legal ownership means that you can use security tokens for trading with a wide range of assets. Similarly, you can utilize them as your collateral for loans.
Security tokens are revolutionary because they have changed the perception behind asset ownership. They have challenged the traditional setups where assets were mainly available to wealthy individuals and have facilitated people from all echelons to access, own, and receive dividends from them.
This is made possible due to the fact that these assets can be fractionalized .i.e. people can own them in portions. Security tokens offer multiple benefits. These are the following.
- They remove the likelihood of scams which are quite common in the cryptocurrency circles. This is because businesses that offer cryptocurrencies have to comply with strenuous regulatory requirements.
- Security tokens are similar to stocks as they can also provide investors with quarterly dividends in exchange for their assets. Therefore, security tokens are considered a reliable revenue stream.
- If a startup creator launches an STO (Security Token Offering), they tap into an international pool filled with hundreds of investors.