Utility Tokens
Hi friends! Short article today.
I've talked a fair amount on this blog about how crypto tokens can usually be thought of as more like equities and less like currencies. Often, tokens are effectively shares in a protocol or project and can be thought of as security tokens.
Today, I'd like to explore another type of token: utility tokens.
What are Utility Tokens?
In the simplest of terms, a utility token gives its owner access to a product or service. A simple analogy is that a utility token can serve as the key that unlocks a gateway that gives access to something.
That "something" could be really anything! The possibilities are endless…
Jeff Dorman, CIO of the crypto fund Arca, imagines a world in which an Amazon Prime membership is a tokenized asset. In such a world, you could get a discount on your annual Amazon Prime membership by being an AMZN token holder. (Note, that example is a bit more of a hybrid between "utility" and "security," but it's already a bit of a gray area, as I outline below). A use case like this is part of what makes crypto so exciting; it helps give ownership to the users of a product.
If we're thinking in a more crypto-native sense, that utility token could get you early access to an NFT. Or maybe it could let you borrow at a lower rate on a decentralized lending platform.
Lots of tokens in crypto-land today (if not the vast majority) claim to be utility tokens but are actually more like security tokens. Crypto projects tend to market their tokens as utility tokens to avoid being classified as a security by the SEC, which would cause a lot of legal and regulatory ramifications. Basically, no one wants anything to do with security tokens. In July, Uniswap (a large decentralized exchange) de-listed around 100 tokens for this very reason.
How does the government decide which tokens are securities? They use something called the Howey Test. A true utility token does not pass the Howey Test. Importantly, that means that utility token holders should expect no profits to be earned from holding the token.
Now, utility token holders can still profit based on price appreciation of the token (due to supply and demand dynamics in the market), but they shouldn't expect to earn cash flows from the underlying business or protocol that the token represents.
What are Examples of Utility Tokens?
Binance Coin (BNB)
Binance is one of the largest centralized crypto exchanges in the world. They also have a coin - $BNB. Initially, BNB was an ERC-20 token built on top of the Ethereum blockchain. As Binance launched its own chain (Binance Smart Chain), it began issuing its BNB there instead.
Today, BNB is the third-largest cryptocurrency in the world by market cap. BNB gives its holders several benefits:
Discounts on trading fees. If you trade on Binance, you can opt to pay your trading fees in BNB. By doing so, you'll earn a 25% discount on your fees.
Influence on which tokens that Binance lists on its exchange
Convert small balances of many other tokens into BNB. Let's say you have a bunch of random tokens in your Binance account with very small values (0.00043 of $XYZ token, for instance). With 1 click, you can convert those small holdings into BNB.
Payment. Some websites are now accepting BNB as payment instead of the US dollar. The use cases are still extremely limited, but we're still early.
Friends with Benefits (FWB)
I've mentioned Friends with Benefits on this Substack before, but I'm going to mention the project again because I think it's super interesting. Friends with Benefits has a token called $FWB. I'd consider that token to be both a social token and a utility token.
The Friends with Benefits token ($FWB) gets you access to the group's Discord (filled with amazing, interesting people), their weekly newsletter, and sometimes even IRL parties, like the one they held during the Bitcoin conference in Miami!
Note: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.