Utility tokens enable a user to purchase future access to a product or service in Initial Coin Offerings (ICOs) or Token Generation Events (TGEs).
The functionality of a Utility Token
Otherwise called app or user tokens, utility tokens provide a user access to a future developed product or service in a particular blockchain project. Utility tokens give users an opportunity to participate and partner in a company, while the company generates capital to fund its hopeful blockchain project.
While utility tokens aren’t meant to be investments per se, users can purchase tokens in hopes that demand for the company’s product or service will rise. With a rise in demand, the value of the tokens will increase, in theory.
Utility tokens can be used for a variety of means, which makes them a desirable and versatile option for crowdfunding. Their application to various projects can be customized to fit the needs and desires of the company in question.
Contrasted to security tokens, utility tokens function as a digital coupon for a future benefit rather than backed by a real financial asset.
As with many ventures in the crypto market, there is risk involved in a token investment. Utility tokens offered in ICOs can be a financial liability, because the leaders behind a blockchain project can take the funds invested in the project without delivering the promised reward. There’s always the risk that a project falls through, and there is often no guarantee that a user receives their funds back from a failed project.
Utility tokens are exempt from regulation and security laws, but ICOs with utility tokens can be under added scrutiny from financial regulators. Utility tokens mobilize users by offering a product or service benefiting them, making their purchase worthwhile as the blockchain grows and develops.