Utility tokens have the highest potential for parabolic gains, but also losses. But it’s not all pixelated sunshine and rainbows. The hype and narratives in crypto today are primarily based around utility tokens in DeFi, web3, and the metaverse. To cast a vote, you must connect a crypto wallet with AAVE tokens and select “Yay” or “Nay” on a given proposal. Holders of some of the best DeFi coins, such as AAVE, can vote to provide grants to projects building on the Aave protocol. This gives the token holder a right to vote on decisions that shape the future of a protocol. VotingĪside from offering rewards, some utility tokens also have governance features. While this mechanism can be profitable, many DeFi investors will deposit their LP tokens into another protocol to maximize yield, AKA yield farming.
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Since liquidity pools earn trading fees from each swap, liquidity providers can redeem LP tokens for their share of the pool plus profits. So if you deposited $10,000 into a PancakeSwap pool with a total value locked (TVL) of $1 million, your LP tokens would represent 1% of that pool. To do this, DEXs generate liquidity provider tokens (LP) representing each depositor’s share of a given pool. Most automated decentralized exchanges (DEX) must incentivize users to deposit assets into liquidity pools. But to keep things simple, let’s look at two of the most common examples of how utility tokens work. These days, there are many forms of utility and they'll only grow larger over time. The crypto space was so simple back when developers' only goal was to make a faster Bitcoin. But the same can't be said for most meme coins (sorry, Doge). This means token holders of utility and security tokens and some NFTs can do more than just speculate over price. When you buy an NFT, you're mostly investing in representations of one-of-a-kind digital artworks, but they can also offer utility through features like royalty payments. In contrast to utility tokens, security or equity tokens represent shares in a company, and meme coins like Doge are just made for the lulz. For one, utility tokens give users certain rights over a project or decentralized autonomous organization or community. Simply put, utility tokens enable use cases that aren’t possible with the blockchain’s own native coin. Most crypto tokens today are built on Ethereum’s token standards like ERC-20 and ERC-721. Tokens are digital assets built on an existing blockchain. In other words, they’re the default payment method of a network For example, ETH on Ethereum and BNB on the Binance Smart Chain are considered coins.
In reality, most cryptos fall into one of two main categories: coins and tokens.Ĭoins are the native currency of a blockchain platform, and they're used to settle transactions. While most use 'cryptocurrency' as a catch-all term for blockchain-based digital assets, not all cryptos are technically currencies.
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