Utility tokens power everything in the crypto verse from transaction fees to accessing special features on blockchain platforms. They aren’t just another digital coin to trade. But with so many types of tokens out there, it’s easy to get confused. This guide will break down what a utility token is, how it works, and what you need to watch out for if you're thinking of getting involved.
What is a crypto utility token?
A utility token is like a digital pass that lets you send on-chain transactions, and access products, services, or features within a blockchain platform.
The utility tokens provide access to certain features on a blockchain, such as paying transaction fees or getting access to special services. For example, if you're using the Ethereum network, you'll need Ether (ETH) to cover transaction fees. Similarly, Binance Coin (BNB) can help you save on trading fees when using the Binance exchange.
The key thing to remember is that utility tokens aren’t just for investments. You don't buy them hoping to make a profit from the success of the project. Instead, they have a specific job to do, often acting as the "fuel" that keeps the digital ecosystem running smoothly.
How do crypto utility tokens work?
Utility tokens are designed with real use cases that add value to the platform. Here are some key characteristics of utility tokens:
1. They unlock access to services
You need utility tokens to use certain features on a platform, pay transaction fees, or join exclusive events. For example, if you're using the Binance exchange, holding Binance Coin (BNB) can get you discounts on trading fees.
2. They have a specific job within the ecosystem
These tokens are usually designed for internal use on a particular platform. They act as the "fuel" that keeps the platform running smoothly. Take Ether (ETH), for example—you need it to cover gas fees when you make transactions or run smart contracts on the Ethereum network.
3. You can trade them, but that’s not their main purpose
Utility tokens can be bought, sold, and traded on crypto exchanges, and their market value can go up or down. However, trading isn't their primary purpose. Their real value comes from what they let you do on the platform, not from speculation.
4. They’re not investment tools
Unlike security tokens, utility tokens don't give you ownership in a blockchain or promise you profits. When you buy a utility token, you’re not investing in the business—you’re just getting access to its services.
How to buy crypto utility tokens at low price?
You can buy crypto utility tokens at low prices through a variety of methods:
- Initial Coin Offering (ICO)
- Initial Exchange Offering (IEO)
- Airdrop and Retroactive Distribution
- Staking and Yield Farming
- Initial DEX Offering (IDO)
1. Initial Coin Offering (ICO)
An ICO is like a crowdfunding campaign for crypto projects. The project sells utility tokens before its product or service is fully developed, usually at a discounted price. Investors pay with established cryptocurrencies like Bitcoin or Ethereum and hope the project succeeds.
Example: Back in 2014, Ethereum raised about $18 million through an ICO. People who bought Ether (ETH) early got it for a fraction of its current value. Today, ETH is used to pay transaction fees and run smart contracts on the Ethereum network.
2. Initial Exchange Offering (IEO)
An IEO is similar to an ICO but happens on a cryptocurrency exchange. The exchange acts as a middleman, verifying the project and selling its tokens directly to users. It’s generally considered safer than an ICO because the exchange does some of the vetting.
Example: In 2023, Sui Network launched a public sale by partnering with KuCoin, a centralized exchange. Each participant could buy up to $1,000 worth of Sui tokens at $0.10 per token. In total, the Sui decentralized network raised 22,500,000 USDT. These public sale activities incentivize users to use the exchange more frequently.
3. Airdrops and Retroactive Distributions
Airdrops are like free samples—you get tokens for free, often as a reward for holding another cryptocurrency or participating in the project's community. Retroactive distributions work similarly but usually reward users who have already interacted with the platform.
Example: Optimism (a layer-2 Ethereum network) allocated 255,901,955 OP tokens for an airdrop to active blockchain users who engaged actively with apps across the Optimism ecosystem. The snapshot was taken on 15 September 2024.
4. Staking and Yield Farming
In DeFi projects, you can earn utility tokens by staking or yield farming. This means locking up your tokens in a smart contract to support network operations, and in return, you get rewarded with new tokens.
While yield farming can offer high rewards, it also carries additional risks. The value of the provided tokens can fluctuate, leading to "impermanent loss." You could also lose your funds if the platform’s smart contracts get hacked. Always do your research and stick to trusted platforms to keep your assets safe.
Example: A Sui user can provide a pair of tokens, such as hasSUI and SUI, to the Cetus liquidity pool. By doing so, they can earn 1,515 SUI per day with an APR of 5.44%.
5. Initial DEX Offering (IDO)
An IDO is a bit like an IEO but on a decentralized exchange (DEX) instead of a traditional, centralized one. IDOs are generally faster and more transparent because there’s no central authority approving the project.
Example: Raven Protocol (RAVEN) had an IDO on Binance DEX in 2019. The tokens sold out within seconds, showing just how quick and efficient IDOs can be.
How to buy utility tokens?
You can buy utility tokens on centralized exchanges (CEX) like Binance, and Coinbase, or decentralized exchanges (DEX) such as Uniswap. There are a few different ways to make your purchase:
- Buying with fiat money on CEX
- Buying through the "Convert" feature on CEX
- Placing a market or limit order on CEX
- Swapping token on DEX
Buying with fiat money on CEX: Many cryptocurrency exchanges, like Binance, Coinbase, and Kraken, allow you to buy utility tokens directly with fiat money (e.g., USD, EUR, AUD) using a credit/debit card or bank transfer.
Buying through the "Convert" feature on CEX: Many exchanges offer a simple "Convert" feature, which lets you quickly swap one cryptocurrency for a utility token without needing to place market/limit orders. This is ideal for beginners who want a fast and straightforward way to buy tokens.
Placing a market or limit order on CEX: If you're familiar with trading, you might prefer using market or limit orders:
- Market Order: This option buys the token instantly at the current market price. It’s quick but might cost a bit more due to market fluctuations.
- Limit Order: With a limit order, you set the price you're willing to pay, and the order only executes if the market reaches that price. It’s a good way to avoid overpaying but might not always get filled if the market moves away from your target price.
Swapping tokens on DEX: You can also buy utility tokens by swapping them on a decentralized exchange (DEX) like Uniswap, PancakeSwap, or SushiSwap.
- Connect your wallet: First, connect a compatible wallet like MetaMask, Trust Wallet, or a hardware wallet to the DEX.
- Prepare gas fees (network fees): Make sure to check which blockchain the DEX is on to prepare for gas fees, which are used to pay for transactions. For example, if the DEX is Sushi Swap on Ethereum, the gas fees will be in Ethereum.
- Select the tokens to swap: Choose the token you want to swap and the utility token you wish to acquire.
- Confirm the swap: Review the transaction details, including fees, and confirm the swap in your wallet.
How to identify a crypto utility token
Identifying whether a token is a utility token is not as complicated as it might seem. Here are some practical steps to help you determine if a token is designed for utility purposes:
1. Check the project's website and whitepaper: Start by visiting the project's official website and reading its whitepaper. The whitepaper is like a blueprint for the project. It should explain what the token does and how it fits into the platform. If the token is mainly used for paying fees, accessing features, or participating in the platform, it’s likely a utility token.
2. Look at the "Tokenomics" or "Utility" section: Most legit projects have a section on "Tokenomics" that breaks down how the token is used. This is where you’ll find out if the token is needed to access services, pay transaction fees, or unlock special features within the platform. If that’s the case, it’s probably a utility token.
3. See what the token can actually do: Ask yourself: What can I do with this token? Can you use it to pay for something on the platform, get discounts, or participate in governance? Utility tokens usually have a specific function that adds value to the platform.
4. Avoid tokens with profit promises: If the token offers dividends, ownership, or profit-sharing, it’s more likely a security token, not a utility token. Utility tokens aren't meant to make you money directly—they’re designed to be useful within the platform.
For example, Binance Coin (BNB) is a utility token because it gives you discounts on trading fees within the Binance exchange. Similarly, Uniswap utility token holders vote on changes to the Uniswap protocol.
When in doubt, take a step back and dig into the project’s details. If a token sounds too good to be true, it might not be a real utility token. Doing a little homework now can save you from a lot of trouble later.
What are the differences between crypto utility tokens and security tokens?
Utility tokens are popular, but no tokens want to be security tokens. Back in 2023, Gary Gensler, the Chair of the SEC, took a hard stance on crypto. He released a list of tokens he considered securities and even sued major exchanges like Binance and Coinbasefor offering them, such as Solana, Cardano, XRP, etc.
This created a lot of uncertainty in the market, with many projects worried they’d face legal trouble. But when Gensler stepped down, the situation changed. Those tokens were no longer securities.
Here are key differences between utility and security tokens:
1. Purpose: What are they for?
Utility tokens are all about providing holders access to specific products or services on the blockchain. You acquire utility tokens to unlock features, pay fees, or join exclusive events. For example, Ethereum's Ether (ETH) is a utility token because you need it to pay transaction fees on the Ethereum network.
Security tokens represent ownership or a financial stake in a project or company, much like stocks or bonds. When you buy a security token, you’re often expecting profits through dividends, revenue sharing, or an increase in token value. The value of security tokens depends on the success of the underlying business, and they often promise a return on investment.
2. Regulation: Who's watching?
Security tokens are heavily regulated. In the U.S., for example, they must comply with federal securities regulations, and the Securities and Exchange Commission (SEC) keeps a close eye on them. This means security tokens have to meet the same regulations as traditional financial securities.
Utility tokens, on the other hand, usually avoid these strict regulations, as long as they are genuinely used for platform access and not marketed as investments. However, if a utility token starts acting too much like a security—such as offering profit-sharing or ownership—regulators might require it to comply with the same regulations as security tokens. This could lead to legal complications and potential penalties for the project behind the token.
3. Profit Expectation: What do you get out of it?
Security tokens are more like traditional investments. When you buy one, you're looking for a financial return—whether through dividends, profit-sharing, or an increase in the token’s value. The security tokens represent ownership in a company or project.
Utility tokens aren't about making money. Their value lies in what they let you do within a platform. You buy them to use, not to hold onto and hope they go up in value. They are more about functionality than profit.
4. Legal Classification: How to tell the difference?
The SEC used to use the "Howey Test," to determine if a token is security. According to this test, a token is likely a security if:
- There is an investment of money.
- The investment is in a common enterprise.
- There is an expectation of profits primarily from the efforts of others.
However, applying the Howey Test to cryptocurrencies is still a hot topic of debate. For example, the SEC had multiple attempts to classify XRP as a security token, but it ended in a loss.
Since Gary Gensler stepped down, the SEC has not accused any more tokens of being securities using the Howey Test. Currently, the government is working on new laws and regulations for the crypto market, which could soon bring a clearer definition of what qualifies as a security token.
What are the disadvantages of crypto utility tokens?
While crypto utility tokens offer practical uses within blockchain ecosystems, they also come with many disadvantages like:
- High price volatility
- Lack of stability and sustainability
- Difficulty in assessing real value
- Legal and regulatory risks
- Risk of scams and fraudulent projects
- Low liquidity
1. High price volatility
Utility tokens can be incredibly volatile. Their prices often swing wildly, driven by market hype rather than actual use on the platform. Take Ether (ETH) as an example—it shot up to around $4,098 in March 2024 but crashed to $2,121 in August 2024. If you buy at the peak, you could lose most of your investment when the market cools down.
2. Lack of stability and sustainability
Not all utility tokens are backed by solid projects. Some tokens are launched without a clear business plan or development roadmap. When things go wrong, these projects can stall, and their tokens can become worthless. Tezos (XTZ) raised $232 million in 2017, but internal and legal issues delayed its progress. As a result, its token price dropped from over $4 to under $0.40 in just a year.
3. Hard to tell the real value
A utility token's market value doesn't always match its actual utility. Sometimes, tokens get hyped up, and prices soar without much substance behind them. BitTorrent Token (BTT) is a good example—it skyrocketed 15 times in value shortly after its launch, but its practical use never caught up, and the price quickly fell.
4. Legal and regulatory risks
The legal status of utility tokens can be a gray area. If regulators decide a token is more like a security, it could face serious legal trouble. The Telegram Open Network (TON) raised $1.7 billion, but the U.S. SEC stepped in, calling its tokens unregistered securities. This forced Telegram to return investors' money and pay an $18.5 million fine.
5. Risk of scams and bad projects
Since it’s easy to create a utility token, not all of them are legit. Scammers can set up projects just to take your money and disappear. For example, Bitconnect (BCC) is a notorious example lured in investors with promises of high returns but turned out to be a Ponzi scheme. The token price crashed from $476 to nearly zero, and investors lost around $2 billion.
6. Low liquidity
If a utility token isn't popular, you might struggle to sell it when you want to cash out. Many lesser-known tokens have low trading volumes, making it hard to find a buyer. Dentacoin (DCN), for example, aimed to disrupt the dental industry but ended up nearly worthless. Its low liquidity meant investors couldn't easily trade their tokens, especially as interest in the project faded.
Utility tokens can offer genuine utility within blockchain platforms, but they also carry real risks. Doing your research and understanding the potential downsides is crucial before investing.
Should you invest in crypto utility tokens?
Utility tokens let you access services, pay fees, and take part in specific platforms. Some people buy them as an investment, believing that increased demand for the blockchain’s services will drive the token’s price higher.
But utility tokens can be super volatile, and if the project turns out to be a scam, you could lose all your money. Even legitimate projects can fail, leaving the tokens nearly worthless.
That’s why it’s so important to do your homework before jumping in. Read the project’s whitepaper, check if the token has real utility, and make sure the team behind it is solid. A little research upfront can save you from a lot of headaches later.
FAQ
What are some examples of utility tokens?
Popular utility tokens include Ethereum's Ether (ETH), which is used to pay transaction fees on the Ethereum network, and Binance Coin (BNB), which offers trading fee discounts on the Binance exchange. Other examples are Uniswap's UNI, used for governance on its decentralized exchange, and Chainlink's LINK, which pays for data services within its network.
What are the risks associated with investing in utility tokens?
Utility tokens can lose value quickly if the project doesn’t gain traction and users. Additionally, utility tokens do not provide ownership or guaranteed financial returns, making them a speculative investment. It’s important to research thoroughly before investing.
How do utility tokens impact the overall blockchain ecosystem?
Utility tokens keep blockchain platforms running smoothly. You use them to pay gas fees, join in network activities, and vote on governance decisions in decentralized apps.
What is an asset-backed token?
An asset-backed token is a digital token that is tied to a real-world asset, such as gold, real estate, or fiat currency. Each token represents a specific amount of the underlying asset, giving it a stable value compared to purely speculative cryptocurrencies.
