After a long and brutal bear market that continues to drag on, cryptocurrency investors have signaled their interest in a new class of tokens that has more in common with stocks than bitcoin.
Of all the fleeting topics that come in and out of crypto media, security tokens have taken the cake as most enduring and most likely to be a real trend going forward.
Since early 2017, observers have waited with impatience for the moment the market share of ethereum and ethereum-based tokens flipped (see: the flippening) bitcoin’s dominance. Bitcoin’s grip on market dominance has only gotten stronger in the ensuing time, but another flippening just may be underway.
Security tokens have every potential to significantly outperform the utility token marketplace, and, in an extreme scenario, may replace utility tokens completely.
To understand the why and how of it all, let’s unpack what security tokens and utility tokens are, and lastly, why security tokens are better for investors.
What Is a Utility Token?
A utility token can be seen in two ways. First, a utility token is a tool that enables the functioning of a blockchain network for which it is an integral and inseparable part.
Think of the Ethereum network’s native token ether (ETH). For smart contracts to trigger on the network, some amount X of ether needs to be paid as a transaction fee. The transaction fee paid in ether is used as what the network refers to as gas – much like the gas you put in your car to make it run.
Without gas, your car doesn’t run, and similarly, without gas, the Ethereum network doesn’t run. The network and the token can’t exist without each other since the token is baked into the network at a protocol layer level.
The second way to view a utility token is as a credit for accessing the features of a network. Many blockchain dApps operate using this model wherein users need to hold and/or signal ownership of the token to use the application’s features.
Augur, a decentralized oracle/gambling/predictive market application built on Ethereum works this way. To create a prediction market, you need to stake Augur’s token, REP.
However, utility tokens don’t necessarily equate to ownership over the networks or applications they are integral to, and this is where security tokens intervene.
What is a Security Token?
Security tokens operate at the intersection between traditional financial securities and utility tokens. Whereas utility tokens do not convey ownership over a network, blockchain, or application, security tokens issued by blockchains, networks, applications, or to represent assets, will represent ownership over those very assets.
In this sense, when you own a security token, you own a piece of the underlying asset in proportion to the number of security tokens you own for that particular asset. So, let’s say you own security tokens that are issued from a new blockchain network – your security tokens entitle you to returns on the network’s quarterly profits to be paid in proportion to your holdings.
From the beginning of the cryptocurrency market’s entry into the broader financial consciousness, the idea of tokenizing everything has been a major driving force.
Utility tokens, however, are simply not adequate for the job as they don’t translate into direct ownership, a demand that many investors have before they’re willing to put any money down. Security tokens, on the other hand, do.
Because of this, the amount of assets that can be tokenized as security tokens is staggering. Real estate, genetic data, ideas, stocks – quite literally anything material or immaterial can be tokenized and offered as a tokenized asset.
Now, why would anyone want to tokenize an asset in the first place? Tokenization creates instant global liquidity for assets. Moving, buying, selling, or exchanging tokenized assets is cheaper, faster, and more secure than traditional methods for doing any of the above.
Importantly, security tokens are built to comply with securities regulations in advance, so that there is no grey area in regards to their legality.
Utility tokens may not fade out entirely, but they are projected to have a much smaller share in the market as the rise of security tokens occurs over the next several years. A nex.io study concluded that by 2025, the security token market will be worth at least $4 trillion, a number that is many, many times more than the current total market valuation.
Security Tokens, Cryptocurrency’s Next Big Move