Utility tokens can offer numerous benefits to your business and the users of the tokens. The utility tokens can be traded publicly on crypto exchanges with maximum liquidity and less friction. These tokens also present limitless opportunities for integration across different platforms, which help to grow their potential use cases.
If you are thinking of creating utility tokens for your business or are unsure how your business could benefit from tokenization, here is a practical guide on how to do it. It will give you a clear understanding of what integrating utility tokens into your business entails.
What are utility tokens
Utility tokens are user tokens or platform coins. These tokens are usually distributed during crowd sales as a project carries out an IEO. When a firm creates a utility token, it is essentially creating a type of digital coupon that can be used within their ecosystem. These tokens are redeemable in the future when the company launches its platform. Users of such a platform get benefits such as special access to services or discounted fees for using a platform’s services. Utility tokens are not considered an investment in a company. As a result, they are usually exempt from the laws governing securities around the world based on how they are structured.
Security VS Utility
Security tokens can be differentiated from utility tokens based on the functionality and intended use of the tokens. Regulators consider tokens to be security tokens when they are offered as an investment to buyers. As a result, buyers of the tokens expect to make a profit from the purchase of their coins every time the issue makes a profit.
Besides that, holders of the security tokens gain ownership in the firm issuing the tokens. These tokens also give holders a say in the company via a blockchain-based voting system.
In conclusion, the main differences between a utility token and a security token are:
- They are proof of ownership of assets
- Investors have reasonable expectations of receiving dividends from their investment
- The offering is regulated
- You gain access to utility
- There is no direct profit distribution
- The token sale is not regulated
Fungible tokens VS nonfungible tokens
Fungible tokens are tokens that can be interchanged with each other without any discernible difference. A good example of fungible assets is fiat currencies. It simply means that every one-dollar bill in the US is the same as all other dollar bills.
Fungible tokens are commonly used to track balances and to make payments. With fungible tokens, each account involved in a transaction will maintain balance based on the number of tokens it contains. Just a bank account, when a transfer is made, the amount is debited from the source amount and credited in the beneficiary account. A good example of fungible tokens is Bitcoin and all ERC20 tokens.
Non-fungible tokens or NFTs, are unique instances. Every token is distinguishable from the other in the same token smart contract. Since every token is treated as a unique asset, they can have different values. The tokens can be used to represent rare attributes, which can increase their demand compared to those that represent common attributes.
NFTs are used to support an ownership claim on the blockchain and they can be transferred and traded. A good example of NFTs is the assigning of an NFT token to virtual assets such as the cryptokitties Ethereum-based game. The token can be transferred from one entity to another to represent the transfer of ownership of a particle property. A good example of an NFT is the recent sale by Paris Hilton of her cat’s portrait as an Ethereum-based NFT token. The portrait was eventually sold for $17,000.
Supply VS Demand
The main determinant of the value of a token is supply and demand. If a token has a huge supply and little demand, its price drops. The opposite is true; if tokens have low supply and high demand, their value rises.
Supply; token burning & buybacks
Token burnings and buybacks are used to stabilize the price of tokens over time as well as to grow their value by reducing their supply. When a company burns tokens, it can buy back tokens from the market or it can take existing tokens out of circulation.
These existing tokens could be the ones stored in the team wallet or they could be unallocated tokens. The tokens could also have been bought back from a crypto exchange. Token burning events entail sending the tokens to a black hole address, also called an eater address. The black hole address is a public wallet that is built with a mechanism that ensures the tokens are irretrievable. It is publicly accessible and the status of the coin is publicly broadcast to the blockchain network.
Demand; Staking, rewards, special access for token holders
To increase the demand for the tokens, a company can offer a staking mechanism. In staking, people hold their tokens in an online wallet for a definite period and a given a set amount of coins in general, the longer they stake, the bigger the rewards they get.
Besides that, a team can increase demand by offering special access features and services to holders of the tokens. They can also offer rewards for those that purchase services on a given platform using the tokens.
How to integrate a utility token
Tokenization entails the Digitization of Rights. A good example is the right to access a service, which is represented using a digital token secured by the blockchain.
Anyone who holds the tokens has utility. For instance, they can start the car, rent it, or buy insurance. It is the prerogative of the issuer to decide how they will be used. How the tokens are used is defined using smart contracts.
Tokenizing can cover anything. It could be right to access the platform, or the right to bonuses and lower fees. In general, tokenization using utility tokens provides direct access to a platform or service. As the platform or service grows in popularity, the utility of the tokens grows. The result is that the token holders see their value of their tokens grow.
Token integration examples
The Binance Exchange created BNB tokens in 2017. These tokens have numerous use cases within the Binance ecosystem. A major use case is that users get discounts when they use BNB tokens to pay for trading fees on the exchange. Other uses cases for the BNB token are:
- It can be used to participate in tokens sales on the Binance Launchpad
- It is accepted as a payment method by numerous vendors
The BNB token powers transactions on the Binance Decentralized Exchange (DEX)During the sale of the BNB tokens is 2017, 200 million BNB were created. Of these tokens, 10% were sold to angel investors, while 40% of the tokens were to the founders. The remaining 100 million tokens or 50% of the total tokens were sold to the public.
About half of the funds raised during the public sale were ear-market for used in branding and marketing efforts for Binance. Around a third of the funds were used to build the Binance platform and make upgrades within the Binance ecosystem.
Today, the BNB tokens are publicly traded on crypto exchanges. They have a total market cap of around $3.4 billion.
RidePAL is one of the microinsurance products that can be bought via the PAL Network using PAL tokens, the utility tokens of the network. PAL Network is a platform that aims to make the purchase of microinsurance policies simple.
Besides RidePAL, the platform offers other microinsurance products that cover flight cancellation, cracked phone screens, and CancerPAL, which covers expenses for when one is diagnosed with cancer.
Users have a variety of options when purchasing the microinsurance products. However, they will get a 50% discount off the premium if the purchases are made in PAL tokens.
Reddit recently launched Reddit Coins within its platform. The tokens are used to rewards users who make high-quality submissions to the platform.
Holders of the Reddit coins can awards submissions to the Reddit platform with three awards, which are:
Once you awards submission with this award, a Silver Award is displayed next to it and it costs 100 Reddit Coins.
It is the mid-level award and a submission that gets it will have a Gold Award badge next to it. Users also get a free week of Reddit Premium and it costs 500 Reddit Coins.
It is highest level and a submission or comment that get its will have a Platinum Award badge next to it. Users will also get a free month of Reddit Premium and it costs 1800 Reddit Coins.
The Reddit Coins could have great utility on the platform for marketing purposes. They could be used to encourage users to post more content about your project. Besides that, the coins could be given out as part of a contest to encourage generation of more content around your product or service on the platform.
The Brave browser comes with BAT tokens, which are a revolutionary way to pay for attention online. The BAT tokens can be accessed via the Brave Rewards program on the Brave browser.
When a user of the Brave browser joins the Brave Rewards program the browser will begin tallying, via the device’s local storage, the attention a user spends on a site. A corresponding amount of BAT will then be sent to the site a user visited. Users have the option of removing sites they no longer support. Besides that, they can tip creators directly.
The Brave Rewards program will also pay you to view ads using BAT. Every time you view an ad, you will receive 70% of the ad revenue that Brave gets from the advertisers.
A token sale is a limited period during which a company sells a predetermined number of crypto tokens to be members of the public.
What is an IEO
An Initial Exchange Offering (IEO), lets companies sell their tokens to raise capital. It makes them similar to ICOs but with a few key differences. With an ICO, the developer does all the work of ensuring the sale of the tokens goes as planned. Some of the key benefits of an IEO are:
- It makes compliance with laws and regulations easier because of help from the exchange’s legal team
- The IEO allows sellers of the tokens to gain access to a huge pool of existing traders, who already understand the crypto sectors
- An IEO undergoes project vetting by the exchange team, which provides investors with assurances about their investment
Performance; Inwara report
According to an Inwara report, the use of IEOs has been growing rapidly.
One of the main benefits of an IEO is that project developers have a more streamlined process. With IEOs, many issues that cause ICOs to fail are eliminated.
The IEO also helps to reduce the possibility of scams. The reason for this is that experts at the exchange carry out studies to determine the feasibility of a project. Besides that, they implement AML/KYC rules for the issuers and the buyers.
IEOs have been proven fairer for customers. They offer them a variety of options from which to pick and give them more freedom and transparency.
WhitePaper & tech concept writing
The first part is to create a White Paper for the project explaining what it is all about and what its value proposition is for the common person. Besides that, the developers need to do technical writing to explain the technical aspects of the project to those who might want to review it.
Setting the project apart from others
A major goal of an IEO should be to make it as unique as possible from the rest. There are hundreds of projects out there and yours has to be unique enough for investors to pick it.
Most of the advertisements for the IEO will be through non-mainstream channels. For instance, you will need to use influencers, social media platforms, blockchain and crypto events, and related channels.
When to do an IEO
The IEO should only be initiated when you have crystalized an idea and you have a team ready to help you develop it. Having a team ready will ensure that you can make progress on the project, which you can share with the token holders once the IEO is concluded.
TokenMinds has been around since 2016. Thus far, it has helped startups to raise over 70 million dollars. Their team helps startups with marketing and advisory services for IEOs, ICOs, and STOs.
The TokenMinds team has been involved in major token sales such as the Celsius token sale, where $50 million was raised, the Remme token sale where $20 million was raised, and IOTW token sale where $1 million was raised. TokenMinds was picked as the number 1 IEO marketing firm of 2019.
They have specialized IEO packages designed for different budgets. Their packages start at just 1BTC and they include the creation of the Whitepaper, exchange selection, marketing efforts, token development, and exchange listing efforts.