What is a Utility Token?

A utility token, or utility token, is a special type of token that helps in capitalizing or financing projects for startups, companies, or project development groups.

El type of token named utility token used as share receipt in mass sales to raise capital in a project. These utility tokens allow us to have future access to a company's product or service. It is a form of access to a certain value, although this is not entirely guaranteed. These utility tokens do not count as investments, since many countries do not have a regulatory framework for them.

Utility tokens They are helpful when a company wants to create a coupon that can be exchanged in the future for access to its services.. This is often used as a strategy to obtain financing for a project. Because of this, utility tokens are often surrounded by a lot of hype and speculation. Something that makes it quite risky to make this type of acquisition.

In the world of cryptocurrencies, and blockchain, we usually see the name of the utility tokens associated with the projects in development and the calls ICO. The ICOs (Initial Coin Offering) are a means by which a cryptocurrency project can obtain the funds necessary for its development. Precisely, ICOs offer cryptocurrencies or tokens of their new project in exchange for other cryptocurrencies or fiat coins that will serve for its final development. This is a clear example of the use of cryptocurrencies or tokens as a utility token.

The utility token and its use in ICOs

As we have mentioned, cryptocurrency projects use ICOs to offer project stakeholders utility tokens. But surely you will wonder: how does this process work?

Well, the process begins when the project developer decides to make the call to an ICO. In said call, the developer announces the issuance of a certain amount of tokens. These tokens are utility tokens and will have a value determined by the company. This with the aim of reaching a specific amount, deemed necessary for the development of your project. Token prices are generally static, but there may also be a case where the value may fluctuate depending on demand. In addition, ICOs are usually carried out on platforms already defined as Ethereum. This is because it greatly facilitates the task of creating a token and successfully carrying out an ICO on the technical side.

The purchase of these utility tokens is made in different cryptocurrencies and even with fiat currencies. The person interested in the project pays a certain amount of money for the tokens they want and they are assigned to them. The allocation of purchased tokens is directed to an address under the control of the buyer. In this way, the buyer obtains these utility tokens that in the future may be used to access the services of the project to be developed.

Normally, the purchase of utility tokens of a successfully completed project ends up generating profits for the buyer. This is because the purchase price of these utility tokens is in principle much lower than the final price that the tokens acquire. This is especially true if the project ends up reaching or even exceeding its objectives. Hence the great popularity of ICOs and utility tokens throughout this process.

Some examples of utility tokens

Among the examples of utility tokens that exist today we can mention the following:

1. Basic Attention Token (BAT). This ERC-20 token is a utility token that allows access to various BAT services. First, BAT is used for as a means of payment for content creators and publishers. The company behind BAT launched this token in order to create a blockchain platform that helps content authors of all kinds find income in a more equitable way. Meanwhile, users can be rewarded with a reduction in invasive advertising on the pages that host this content.
2. Golem (GNT) it is another example of a utility token. The idea of ​​this token is create an economic system that allows individuals to rent the computing power available to them. In this way, those interested could use said computing power for various tasks and all thanks to a decentralized network.

Utility token issues and challenges

Although a utility token can be a good tool to obtain financing for projects that are under development, its use is accompanied by a certain risk. It was precisely the excessive use of this mechanism, which dragged them to the top during the ICO boom in 2017. And at the same time, which plunged them under high distrust and constant auditing of the projects in 2018.

The reason behind it is that many crypto projects promised unattainable goals , not to mention that utility tokens were not regulated. This situation led many interested parties and owners of utility tokens to lose their «investment«. Something especially crude and true when the project in question has no real utility or they fail to raise the amount necessary for its development.

In this way we can identify that some of the utility token problems are:

1. There is no natural mechanism to increase the value of tokens.
2. In case the project fails, these tokens lack any value.
3. They do not promote the adoption of cryptocurrencies.
4. They do not allow the community to be empowered and empowered to make decisions. In this case the founders and the core team make the decisions without the opinion of the token holders.
5. They have a liquidity problem. This is because a project using utility tokens may or may not reach the capital necessary for its development.