Security vs. Utility Tokens
Disclaimer: The posts on HyperLinq blog and associated sites are for educational purposes only to generate discussion. These posts should not be taken as trading advice, nor are they meant to be viewed as trading advice.
Since the time Bitcoin became mainstream, thousands of new crypto coin and tokens (altcoins) have arisen to function as digital currencies within the blockchain ecosystems. Like with any sector, different groups have been formed to differentiate each coin/token. Crypto coins like BTC and LTC main purpose is to replace the usage of fiat currency. Then there are tokens, which are split into two main groups, security and utility.
Utility tokens are the most widely known form of altcoins because of the increased emergence of blockchain startups in the past year. Utility tokens signify a product of service to a precise function within the blockchain ecosystem. It is significant to understand that utility tokens are not considered as investments as they act a product of service. ERC20 is the standard example of a utility token. Blockchain-based companies are leveraging ETH and creating ERC20 tokens to develop their decentralized application infrastructure and also launching ICO (initial coin offerings) to fund their projects. For example, VeChain, a decentralized, peer-to-peer blockchain platform created to improve supply chain management and business methods. Vechain's purpose is to streamline these methods and data flow for complex supply chains through the use of the distributed ledger technology.
Security tokens are sold to investors in an ICO for exchange of their money; this is similar to buying company stocks in an IPO. A security token is a representation of legal ownership of a digital or physical asset within the offering company. Security tokens are directly connected to the development of the company. For example, Polymath, a network that aims to streamline the legal process of creating and selling security tokens, enables trillions of dollars of securities to move to the blockchain. Polymath also has its ST20 token standard, which is a branch of ERC20, but presents the ability to stop transfers of blockchain tokens. Thus guaranteeing that the security token issuers can uphold regulatory compliance.
After reading this blog, we hope that this has helped you comprehend the differences between utility tokens and security tokens. Whereas one benefits in incentivizing the holders to act in a certain way, the other is a contract that represents legal ownership of an asset
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