Utility Tokens vs Security Tokens
The Definition of Token
The term token refers to a specific virtual currency token or the way cryptocurrencies are denominated. These tokens represent fungible and tradable assets or utilities that reside on their own blockchains. Tokens are often used for crowd sales to raise funds, but can also be used as a substitute for other things. These tokens are typically created, distributed, sold and circulated through the standard Initial Coin Offering (ICO) process, which involves crowdfunding to finance project development.
Two Categories of Tokens
Tokens are generally divided into two categories:
Utility Tokens and Security Tokens.
Utility tokens are tokens that promise future use of a product or service. They are not meant to be an investment, but have a utility. An example that could be considered a type of utility token would be a Starbucks gift card. If you buy it at a discount, you do not really expect to make a profit on the sale of the gift card. Basically, you paid upfront for a cup of coffee and expect to receive it at a later date.
Security tokens, on the other hand, are tokens that represent tradable financial assets, such as a stock or bond of a company.
Security tokens are meant to be a form of investment; they pay dividends, share profits, or pay interest in a way that promises future profits. Put simply, utility tokens promise a product or service, while security tokens promise a profit, but the difference between the two is often slight and the distinction can sometimes be difficult to make.
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