Understanding the Concept of Tokens | Difference Between Security Tokens & Utility Tokens

by Himanshu Goyal Operational Manager

Needless to mention, cryptocurrencies have grown astronomically over the last decade or so, as these digital currencies have continued to support a multitude of applications and use cases. What started as a peer-to-peer payment method in the form of Bitcoin, has today transformed itself into a much larger ecosystem supporting a global digital economy.

Moreover, crypto is not just being used as a peer to peer payments solution, but it is being used for a variety of purposes in personal as well institutional finance through various forms of trading, investments, store of value, as well as a payment method in the world of consumer-oriented business applications.

Hence, it is fair to say that the expansion of cryptocurrencies into a myriad of applications has played a major role in where crypto stands today in terms of mainstream adoption. As these potential applications continue to grow, it is important to have a clear idea about what are the values that these digital currencies bring in various forms of existence. In other words, as we all know, cryptocurrencies are often called tokens, what are the different kinds of tokens and what are their specific purposes. In this article, we will look at the concept of tokens and their different kinds.

What are Tokens?

As mentioned above, cryptocurrencies are otherwise called tokens, which are the most crucial aspect of the overall crypto industry. It is important to note that tokens can be used for a variety of purposes and they exist in various forms - assets, utility, store of value, etc. Tokens are issued via Initial Coin Offerings or Initial Exchange Offerings and are further managed/overseen via smart contracts deployed on distributed ledgers. (blockchain) The general public can comprehend the value of individual tokens based on research and diligence, post which they can buy these tokens to access various services and/or products offered by the token issuing platform. But there is more to the concept of tokens, as there are two major kinds of tokens that can be used for specific purposes. These are - Security Tokens and Utility Tokens.

What are Security Tokens?

Security tokens can generally be defined as tokens whose value is tied to an external asset, and these can be traded on various cryptocurrency exchanges. In other words, these tokens represent a stake in an external asset. For example, a security token might represent an equity stake, debt, or even an asset. Security tokens are generally used for investment purposes. One can buy security tokens through STOs or Security Token Offerings. Security token holders enjoy a certain degree of ownership in the concerned asset as issued or handled by the token issuing organization. Based on this ownership, the holders earn profits in the form of more security tokens or any other form of payment, as mutually agreed upon by the holder and the issuer. Generally, people use security tokens for long-term investment purposes, as they expect the value of the attached asset to grow over time, thus offering an opportunity to earn more profits on the securities. It is important to note that security tokens are regulated by federal laws.

What are Utility Tokens?

Unlike security tokens, utility tokens are generally used for purposes related to buying products and services. For example, the issuing organization might host certain products and services, which the public can buy or access using the utility tokens. In other words, utility tokens are tied to the value of the associated product or service. As the value is acknowledged by more and more people over time, the value of the related token also enhances. Some people buy and hold utility tokens as they predict the potential future value of the associated service or product. Hence, it is fair to say that utility tokens can be used as a store of value and investment avenue, but at the same time, they can be used simply for accessing/buying/renting products or services offered by the issuing organization and its partners.

Ending Note

As the world of crypto continues to expand its horizon, both security tokens and utility tokens will play a major role in carving out new applications and driving the mainstream adoption of cryptocurrencies. They have specific use cases which will continue to remain relevant while offering us many new use cases and applications.

One such token that has recently gathered a lot of eyeballs and is soon launching for private sale is ModiCoin (MDN Tokens). ModiCoin is a cryptocurrency in the DeFi space and is designed to optimize how people handle their digital assets in terms of saving, investing, lending, borrowing, and trading.