Tokens, in general, are the symbol of the digital assets issued on particular projects which are fungible and can be used as a source of payment. These tokens are issued through ICO (a fundraising mechanism) in which companies and startups raise capital for their projects from various investors in exchange for these tokens. In return they are promised some benefits e.g. future services or dividends or interest rates or right to vote in the system depending on the type of tokens issued.
There are various types of tokens, but most of them belongs to utility tokens and security tokens. People often get confused between these two types but both of them carry a huge difference depending on their functionality. Lets understand the difference between them.
Utility tokens v/s Security tokens
Utility tokens are usually backed by projects with most common type of investment done in crypto. Utility tokens are easier to make and the investor is granted some definable benefit in return of investment. Benefits include access to the system, network, right to vote or different services like the cloud storage space. Utility tokes are usually Ethereum based tokens eg: ERC 20 tokens.
Whereas, the Security token’s value depends on the tradeable external asset and it is subject to federal regulations. These tokens are similar to traditional security for the confirmation of ownership that included the long procedure and legal work in the presence of the third party. But, now this confirmation is given on blockchain and also federal regulations are applied for the protection of investors. Such tokenization removes the need of the third party as the entire process is done using smart contracts. Also, if the regulations are not met by the ICO then they are subjected to penalties by SEC.
Types of Security tokens:
- Equity tokens: They represent the value of shares issued by the company. It is similar to the traditional stock. The only difference is the entitlement of ownership. Traditional ownership was recorded on the database and was presented by a legal paper certificate whereas recording for an equity token is done completely on the blockchain. Investing in equity tokens gives the entitlement of a pre-defined portion of the company’s profits or right to vote.
- Debt tokens: The representation of the real estate mortgages and corporate bonds is done through debt-based tokens. The price of such tokens is depended on the risk and dividend included in the real estate economy. The smart contracts should include repayment terms that state the dividend model and specify the possible risk factors of the underlying debt.
- Real Asset tokens: They represent the ownership of an asset such as property or commodities. Commodity backed are difficult to handle because of its complexity like trust issues, inefficiencies, and involvement of third parties. These issues are solved using blockchain technology that offers a transparent recording of complicated transactions, track goods that reduce fraud.
Benefits of Security tokens
- Liquidity: Security tokens enable fractional ownership which lowers the minimum investment requirement thereby bringing more liquidity in the market. Also, Investors do not have to wait for the long term for their maturity dates to access their funds. They can easily liquidate their security tokens and cash it anytime.
- Cost-effective: As the regulations and ownership are clearly written into the token, it reduces the process along with the risk of human error and the need for supervision by the third-party thereby being cost-effective.
- Cross-border trading: When trading cross trading, there is a need to pay legal advisory also both parties have to be compliance with the local laws. With smart contracts, trading securities tokens is easy and simplified as appropriate regulations are written in the contract that eradicates any unlawful transfer making the whole process much more cost-effective and simple.
- New investors: Security tokens create opportunities for issuers and investors to access the global trading market fast and easily as anyone can present their project or idea to anyone with an internet connection.
- No corruption: Any data in the blockchain cannot be deleted or tampered also there is a uniform method of verifying and tracking data periodically enabling a perfect infrastructure to document ownership.
Security tokens can the next biggest trend of the ever-increasing blockchain revolution. So be a smart investor and take advantage of this mindblowing technique