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Utility vs Security Tokens - What's the Difference?

Date
10/04/2024
Written by
Dorothée Enskog
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Utility tokens are, just as security tokens, a category of digital assets issued using blockchain technology. However, they serve different functions and have distinct characteristics.

A utility token is, as its name states, designed to provide its holders access to different utilities – products or services – within a specific blockchain ecosystem. They can offer access to a particular software, discounted trading fees, participation in lotteries and much more.

Contrarily to security tokens, utility tokens are less regulated as they don’t fall under stringent securities frameworks. The largest utility token, Ethereum’s Ether, has a market capitalization exceeding $400 billion. Ether facilitates transactions within the Ethereum ecosystem.

Utility token – examples

Today, tens of thousands of utility tokens, including Lykke’s recently launched utility token LYFFE, run on the Ethereum blockchain and are ERC-20 compliant. This means that the utility tokens adhere toa series of technical standards such as having a transfer function that enables the transfer of the tokens from one Ethereum address to another as well as providing information on the total token supply.

Other utility tokens trading on the Lykke’s exchange are Chainlink and Polygon.

Utility token vs security token

There is a key difference between utility tokens and security tokens. Security tokens represent ownership into the crypto player issuing them. They are similar to shares and in some cases grant investors the right to dividends and or voting rights at annual general meetings. Security tokens thus fall under highly regulated legal frameworks in most countries.

 Utility tokens do not provide any ownership into the issuing crypto firm nor any rights to dividends, so are not considered to be securities and are therefore less regulated.

Similarities exist – based on the same blockchain technology

But there are numerous similarities that should not be overlooked. They are both represented in a digital form on a distributed ledger, a blockchain ledger. They are thus digital assets that can be bought, sold or transferred on online cryptocurrency exchanges, such as Binance or the Lykke exchange.

They are both managed through smart contracts running on a blockchain. These contracts automatically execute certain functions such as transfers when the predefined conditions are met.

Interested in the Lykke’s utility token LYFFE? It can be bought on Lykke Wallet and a white paper explaining its technicalities can be found here.

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