Tokens are an essential element of the blockchain ecosystem, and they come in various forms. Two of the most common types of tokens are utility tokens and asset tokens.
In this article, we will explore the differences between utility and asset tokens and their significance in the blockchain space.
But first, let’s talk about native tokens. Every blockchain has one, which are their own form of inherent digital currency built into the blockchain, and typically needed for transaction fees.
For example: Ethereum’s native token is Ether (ETH), Solana’s is SOL, and so on.
With that out of the way, let’s talk about Utility and Asset tokens.
Utility tokens aim to give users access to particular products, services or actions, by exchanging them with smart contracts or other accounts. In some cases, they can be used paying for transaction fees on a particular blockchain network—this is called gasless transactions.
Utility tokens incentivize users to adopt specific platforms or networks, and are not conceived as investments or stores of value, although they are organically given value by the community. Typically, Initial Coin Offerings (ICOs) create and distribute utility tokens, which provide a means of exchange within a particular ecosystem and fund the development of new blockchain-based products and services. Later on, these tokens can be used as governance tokens in order to collectively make decisions.
Utility tokens derive their value from their usefulness within the ecosystem, as they incentivize users to adopt a particular platform or network.
- BNB Token: Binance Coin is the native utility token of the Binance exchange, and is used to pay for trading fees, listing fees, and other services on the platform.
- UNI Token: Uniswap is a decentralized exchange (or DEX) operating on Ethereum, which aims at having users anywhere in the world to trade crypto without an intermediary. UNI is a governance token that allows users to vote on key protocol changes.
Asset tokens, on the other hand, represent a traditional store of value, an asset or a commodity. They sometimes back real-world assets, such as gold, real estate, or company shares. People can trade asset tokens on cryptocurrency exchanges, and their worth comes from the underlying asset.
The ERC-721 standard is a popular example of an interface for asset tokens. ERC-721 tokens differ from utility tokens in that they represent unique, non-fungible assets such as digital art or in-game items. These assets are characterized by distinct values, determined by factors such as their rarity. While utility tokens have exchangeable value (meaning they are fungible) ERC-721 tokens derive their value from the specific asset they represent and their uniqueness.
These tokens also derive their value from market demand, and traders commonly buy and sell them on cryptocurrency exchanges.
- LAND: this token is used in The Sandbox, a decentralized virtual gaming platform where players can create, build, and share games using blockchain technology.
- CryptoKitties: an online game where players can buy, sell, and breed digital cats using the Ethereum blockchain. Every cat represents a distinct asset token (NFT) that possesses its own unique features and value.
In summary, utility and asset tokens are two of the most common types of tokens in the blockchain space. Utility tokens give users access to particular products or services within an ecosystem, while asset tokens represent a store of value, sometimes based on real-world counterparts. Both utility and asset tokens possess unique characteristics that influence their value. As the blockchain ecosystem continues to evolve, we can expect to see new types of tokens emerge, each with its unique use case and value proposition.