What Does the Utility of a Crypto Token Mean?

When cryptocurrency and blockchain technology were introduced to our world, many saw it as an alternative to fiat currency and the traditional banking system they were used to. Being the first, Bitcoin proved to be more than just regular crypto as it solved the problem of inflation, the double spending problem, and the lack of transparency, among others. 

Today, many more cryptocurrencies and tokens have been created to solve more problems or have a real-life use case, also known as utility.

This topic will look at crypto tokens and their utility. We will explain the types of utility, their importance and challenges, and how utility affects a token’s value. If you want to know what those assets in your wallet help you achieve, this article is right for you.

What is Crypto Token Utility

In economic terms, utility is the measure of a person’s value or satisfaction from using a product or service. This definition is not too far-fetched when discussing crypto. 

In the crypto world, when we ask, ‘What does this coin do?’ or ‘What problem does this token solve?’ We are trying to understand a coin’s real-life use case or practical application, as this determines whether a crypto project will be viable in the long term before investing.

The utility of a crypto token refers to its practical use within a blockchain-based ecosystem. 

Types of Crypto Token Utility

The crypto token utility has two major types: Strong Utility and Limited or Speculative Utility.

1. Strong Utility: In this case, the tokens involved have clear and valuable use cases that drive demand and adoption and are sustainable in the long term. Tokens with strong utility are integrated into ecosystems and provide transaction facilitation, DeFi operations, and platform-specific tools. Their strong demand maintains price stability and growth. Examples are Ethereum and BNB.
2. Limited or Speculative Utility: The tokens listed here are often based on hype or speculation. They lack a clear purpose and experience extreme price volatility. They seldom get long-term adoption and lose value over time. Some are created for pump-and-dump schemes, leading to financial losses. These tokens do not contribute to technological advancement or meaningful user engagement. Memecoins are a good example of this.

Read More: Ten Facts About Memecoin Trading

Examples of Crypto Token Utility 

1. Accessing Services: Some platforms, like Brave and Axie Infinity, offer tokens to access premium features or services, such as the Basic Attention Token (BAT) for advertisers and tokens (AXS and SLP) for in-game purchases and rewards; this is a decentralised and user-friendly ad model.
2. Paying for Transaction Fees: Some tokens are used as fees for processing transactions. Blockchain networks like Ethereum and Binance Smart Chain use their native currencies, ETH and BNB, to run transactions and ensure smooth network performance. ETH covers gas fees, while BNB is used to execute a transaction. 
3. Staking and Rewards: You can stake your assets on some platforms like Polkadot (DOT) and Cardano (ADA) and get some incentives in return.  This makes you want to hold and use the token and, at the same time, strengthens network security and participation.
4. Voting and Governance:  Tokens that give you the ability to influence project decisions are governance tokens. Tokens like Uniswap’s UNI token and MakerDAO’s MKR allow you to propose and vote on protocol changes and DAI stablecoin decisions, giving the community control over major developments.

These are still examples of strong utility that make the tokens listed here more valuable.

Types of Tokens Based on Functionality

Tokens are classified based on what they do as well. Here are some of our token classifications.

1. Utility Tokens: Some crypto projects, ecosystems, and blockchain technologies create special tokens within their platforms to get their products and services. However, this type of token doesn’t give you ownership rights to the project. Utility tokens are obtained through staking, a high user activity level, etc.
2. Security Tokens: Here, you get ownership rights to projects or digital assets that have been tokenized or exist on a blockchain. This is just like owning company stocks but on a digital platform. Security tokens give you legal rights, such as profit-sharing, dividends, or voting power in a company.
3. Governance tokens: This type of token grants you voting rights in decentralized autonomous organizations (DAOs), allowing you to participate in decision-making processes. They give decentralized control, which prevents central authority from dictating project developments, as seen in Compound’s COMP token.
4. Stablecoins: Stablecoins are cryptocurrencies that have a fixed value. They are supported by fiat currency (Euro, US dollars), commodities (gold, oil), other cryptocurrencies, and, in some cases, supply-based algorithms. 

Also Read: What Are Cryptocurrency Airdrops?

Importance of Crypto Token Utility

This is why the crypto token utility is important.

• Utility tokens close the gaps between blockchain technology and practical applications. This drives real demand for the token.
• A powerful utility token strengthens the ecosystem, stimulating interest and participation and adding to the total value of the blockchain project and its sustainability.
• Utility tokens allow you to participate in project decision-making and promote community ownership and project evolution.
• Utility tokens are the essential ingredient of decentralized economies. Their main function is enabling transactions, rewarding contributions, and incentivizing users, leading to a dynamic and self-sustaining economic environment.
• Utility plays a major role in distinguishing the most valuable projects from those based on cryptocurrency market speculation.
• Projects with utility tokens will last longer and contribute more to the ecosystem than just the speculative tokens.

How Utility Affects a Token’s Value

These are how a crypto token’s value is affected by its use case.

1. Demand: A token with a practical application creates genuine demand. Demand driven by actual usage is more sustainable than demand based on mere speculation.
2. Intrinsic Value: A token’s value is determined by its utility, thereby giving it intrinsic value. The stronger the intrinsic value, the more resistant the token is to price fluctuations.
3. Long-term Potential: The Utility of a token will determine if the project has long-term potential or is just a short-term trend.
4. Token Scarcity: When tokens are burned during transactions, the circulating supply is reduced, and the value of the remaining tokens is increased.
5. Token Distribution: Tokens with strong utility and fair distribution can build trust and encourage adoption.

Challenges and Considerations of Crypto Token Utility

Crypto tokens face some key challenges, which are

• High fees and slow transactions can limit the tokens’ usability. 
• Prices can be unpredictable, even for utility tokens.
• Security risks like hacking and smart contract flaws can cause major losses to the project.
• The adoption of a token depends on how many people actually use the token, and 
• Strong competition from rival projects means projects must keep improving.

Read More: What Are Cryptocurrency Airdrops?

Conclusion

If you understand the utility of a crypto token, you will make informed decisions before investing or using one. A token with a good use case will drive real-world applications, get adopted, and hold long-term value, while speculative tokens often lose relevance over time.

The crypto space is dynamic. Thus, analyze the token’s use case before investing. Ask yourself: Does this token solve a real problem? If the answer is affirmative, it will likely succeed in the long run. It is good to understand your investments well.