Utility Tokens, Security Tokens—And The Benefits of Both Worlds

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Utility Tokens, Security Tokens—And The Benefits of Both Worlds
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Bitcoin for many has become passé, its usability is limited to mostly speculative purposes and the currency itself holds no real value as a means of exchange. When a currency is so volatile, one day worth $10, the next day spiking 10%, this makes it infeasible. For instance, you go into Starbucks to buy a coffee one day and use Bitcoin to pay, that coffee might cost you $1, reasonable, and the next month the price of Bitcoin soars, making your coffee now cost $100. That better be a damn tasty coffee for $100!

This is where utility tokens came into play, effectively rewriting the use case of cryptocurrencies.

What Are Utility Tokens?

A utility token is a digital token that has been issued by a project or protocol to generate funds for the development of that project. These tokens bestow a number of utilities to their holders, including the ability to buy a good or service on that project, platform, or protocol.

Some utility tokens are used for investment purposes and simply by holding them, can that investor make passive income, by staking it. Other utilities include giving the holder governance and voting rights, which are powers to determine the future path of the protocol, in a form of ownership, much like shareholders in a publicly listed company. You would think then that the utility token is based on the value of the project behind it. Does the project offer real-world usability? Does it solve problems or make people’s lives better?

Utility Tokens Orbit Bitcoin

And yet, even utility tokens have not been able to pull away from the drag of Bitcoin. When Bitcoin moves, the utility tokens follow (unwillingly) behind. That is mostly because the wider audience does not yet understand the real value of the projects that sit behind these tokens. If they did, they would certainly treat the value of the tokens very differently to Bitcoin’s value.

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This is something that could change with time, given enough education to enough people. The problem with the blockchain is that it is hard to explain and even harder to understand. It is, however, positively genius in the utility it brings. For instance, DeFi has the ability to rewrite the entire financial system. It has the capabilities to promote trustless, decentralized finance, which is unimpeachable by the human hand – with no interference from central bankers or individuals. DeFi apps already function well for banking, savings. earnings, loans, and for investing purposes.

What is a Security Token?

Security tokens are different. They merge the benefits of the blockchain with the security of regulatory controlled assets. They present partial ownership in any asset, by way of tokens. They are a bridge between the traditional finance world and the blockchain. They are used in the equity markets, in fixed income, real estate and funds, commodities, and even structured products tradable on the blockchain.

Whereas utility tokens are not regulated, security tokens remain under the watchful eye of the governing regulatory bodies, who globally manage and supervise how they are used. Security tokens come with many benefits, such as allowing the authentication of transactions to be automatically conducted and verified on the blockchain. They remove the intermediary and they save time and effort on many manual processes, by running them on the blockchain, and yet they also provide the security and legal protection that comes with traditional securities.

One example of a protocol that is offering the tokenization of fractional shares by bringing real-world assets into the DeFi space is ConvX. It offers a convergence of traditional finance with DeFi, in a best of both worlds approach, that reaps the benefits of both systems. Token holders are bestowed with legal rights of the asset, as well as giving investors a lower barrier to entry through fractional shares. It makes the illiquid more exotic assets more liquid through its asset pools and can be traded by anyone. Holders of the native token CONV can have voting and governance rights on the future of the protocol, and by providing liquidity they can gain rewards such as a portion of users’ transaction fees as well as first rights to new asset offerings.

The Bottom Line:

Digital ownership of assets is convenient, with a digital record of every transaction being recorded instantaneously on the blockchain. Operationally this method of ownership can boost operational efficiencies, including settlement time through automated issuance. It brings a whole new pool of potential investors to asset owners and can lower the barrier to entry to investors through fractional ownership.