What Is The Difference Between Cryptocurrencies, Utility Tokens, And Equity Tokens?


Cryptocurrencies have become the talk of the town over the last couple of months. However, one must keep in mind that not all the “cryptocurrencies” that are being talked about are currencies at all. The following discussion aims to create a strong distinction between the various cryptos out there. Let’s begin with the most obvious one.

Cryptocurrencies

Cryptocurrencies are essentially digital or virtual currencies that can be used as a medium of exchange. The aforementioned statement answers the currency part of the word, but where does the crypto part come in? Well, the crypto part of the word basically means that cryptography is actively employed to help secure and verify transactions of the currency, while also ensuring that no more than a specified amount of the currency is ever mined.

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The most obvious example of a cryptocurrency is the infamous Bitcoin.

Nowadays, certain tokens are being used to help fund projects of shared infrastructure that couldn’t be funded before in traditional ways. In order to enable the “crowdfunding,” a company or a group of developers, working on a project, pre-mine a certain amount of the tokens to be distributed in an Initial Coin Offering. There are two types of such tokens.

Utility Tokens

Utility tokens represent a service or units of a service that can be purchased directly from a project. Essentially, they give holders a right to access the service the project offers. These tokens don’t have an intrinsic value, but they derive their value based on the perceived usefulness of the project. I’ll try and explain this using an example.

GNT is a token that enables holders to participate in the Golem network. The Golem network was created with the aim to utilize computing power from idle computers the world over. Suppose you need to perform a particular task but need additional computing power. You can log into the Golem network and use another participant’s idle computer to perform the task. For renting this additional computing power, you send a certain amount of the GNT token as rent. This GNT can then be exchanged for fiat.

Equity Tokens

As the name suggests, the equity tokens represent ownership of an asset, such as debt or company stock. Instead of taking the usual route, the project or company employs blockchain technology and smart contracts to issue shares and voting rights over the blockchain. These tokens are then sold at a certain price to the public in order for the project to raise the required amount of capital. Additionally, a lender could create tokens that represent debt owned by the company, enabling loans to be bought and sold in a high-liquidity environment.

Unlike utility tokens though, these tokens do not provide the holders with an access to a service.

Now while these currencies and tokens have different utilities, all of them are governed by a few central ideas.

  • Decentralization: All of these “coins” are decentralized through blockchain technology. There is no central authority that governs the economics of the coins.
  • Limited in supply: All coins are limited in supply. This is essentially what makes them valuable. The price of the coin is determined primarily through the laws of demand and supply.

In future articles we aim to make more sense of the crypto space. Due to the vastness of the topic, it’s hard to give solid conclusions to all the ideas that we introduce in our discussions. That is why, we urge you to write in at content@trefis.com if you have any questions and/or comments regarding the new coverage.

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