The cryptocurrency world is chock-full of technical terms and financial jargon. Even for the most experienced investors, these concepts can be difficult to grasp. Take the terms coin and token for instance. Despite referring to assets with completely different investment characteristics, these terms are often used interchangeably. To have a better understanding of what utility tokens are, it’s helpful to define what cryptocurrency, coin, and security tokens are in conjunction.
UTILITY TOKENS SIMPLIFIED
The word cryptocurrency refers to both coins and tokens since it is an umbrella term for any digital asset that is exchanged over a blockchain ledger. This means that cryptocurrency is a word used to recognize the overarching technology of blockchain and encryption used to establish a medium of exchange.
Now, let’s consider the difference between a coin and a token. Essentially, a coin is a medium of exchange like the USD. It can be used in exchange for everything or anything. Therefore, coins are the very definition of “currency”, since they are easily exchangeable for goods and services. An example of a coin would be Bitcoin or Litecoin.
On the other hand, a token is a digital asset that’s tied to a very specific blockchain project. When a company launches a blockchain project, they will often offer a token in exchange for capital from interested investors. Since these tokens don’t hold any value outside of the scope of the project, they are not easily exchangeable for goods, services or other assets; unlike coins.
You can find out more about differences between coins and tokens in this article Coins vs Tokens here at GetSmart Hub.
Lastly, let’s discuss the difference between a utility token and a security token. It’s all comes down to functionality. Basically, a utility token gets its name based on its ability to be used to purchase a good or service provided by the issuer of the token sometime in the future. Therefore, a utility token is like a coupon or voucher, which may be redeemed at a later date.
This is in contrast to a security token which does not have any future utility for its holder. Security tokens are simply equity that has been issued by the blockchain company. Like a stock or promissory note. We’ll talk more about the different types of tokens in the following articles.