What are Web3 Tokens and Token Utility? A Simple Guide

Learn more about the Web-3 world by reading this layman’s guide to tokens and Token utility.

by Janelle Borg of AmplifyYou

The crypto industry is developing at a rapid pace. The number of new tokens and coins being developed each day is astounding. This means that there is undoubtedly a lot of confusion about how these systems work together. In this guide, we will take an in-depth look into token utility, what it means for you, and how it can affect the value of your money going forward. Whether you are just learning about cryptocurrencies or have been trading them for years, this article will help shed light on where tokens are heading in the near future.

Table of Contents

1. What are tokens?
2. What is token utility?
3. Different types of utilities
   1. Governance
   2. Payment method
   3. Yield farming
   4. Staking 
4. Final notes

What are tokens?

Tokens are the digital assets that make up the blockchain ecosystem. Essentially, they are the modern-day equivalent of currency and are used as a medium of exchange within the crypto-economy.

There are thousands of different tokens which can be used in various ways. Some tokens offer access to certain services, while others grant voting rights or even dividends. Some tokens have multiple uses, and many don’t even have an official use at all!

In simple terms, tokens are units of value that are transferred from one party to another over time, in accordance with certain rules defined by their creators. The most famous example is Bitcoin (BTC), created by Satoshi Nakamotoin 2008 as a digital form of electronic cash that could be sent peer-to-peer without needing third parties like banks or credit card companies involved in transactions. This system is now known as peer-to-peer cryptocurrency exchange (P2PCX).

Tokens can come in different forms: security tokens represent an ownership stake in an underlying investment asset; utility tokens provide access to some services or products offered by their issuing company.

What is token utility?

The first thing to know about token utility is that it represents the purpose of a token. Utility tokens can be used to access certain services, products, networks, and platforms. For example:

• A token might grant its holder access to an online game or social network.

• It might be used as a payment method for goods and services in an e-commerce marketplace.

• Customers could use a token to pay for premium content on streaming platforms.

In this sense, a token’s utility is its ability to provide value for its holder. The most common types of uses are governance, yield farming, staking, and as a payment method, which we will further explore in this article.

Different types of utilities

Governance

One of the most common token utilities is governance. This means that token holders have the opportunity to lead a project, dAPP or DAO, and help steer its direction alongside other token holders.

Governance rights typically include the opportunity to vote on proposals, the direction of the project, and the recruitment of new team members. By ensuring that all token holders have the same say, tokens are a useful way to protect decentralization, and that power does not fall into the hands of a single entity.

Payment method

Utility tokens are a new type of asset class that can be used as a means of payment. They are not just used as a form of payment, but can also be used to access goods and services. In the case of Bitcoin and other cryptocurrencies, for example, users can exchange digital currency for goods or services in exchange for legal tenders (e.g. US dollars) or other cryptocurrencies through third-party exchanges.

Yield farming

Yield farming is a type of cryptocurrency investment strategy that involves staking your cryptocurrencies to earn rewards, usually in the form of additional tokens.

The term “yield farming” can be a little confusing and misleading at first glance. In the real world, farmers are paid for their crops by selling them to grocery stores or other buyers and then taking their profits in cash. However, in cryptocurrency yield farming, there’s no clear way to cash out yet. Therefore, it is all about staking your assets and earning tokens as rewards for doing so.

Staking 

Since staking is a very complex process, it can be easier to consider the staking process as similar to depositing money into a savings account. By depositing a sum of money into their account, the depositor earns interest on this sum as a reward from the bank, which uses the depositor’s money elsewhere.

Staking is therefore similar, as it is the process of locking up your rewards or tokens to earn interest or other rewards. It is generally considered less risky than yield farming, as holders only need to stake one token to start earning more of that same token.

Final notes

Utility tokens have proven to be game changers for project creators and token holders alike. This is because they give creators the opportunity to create a more engaging and decentralized project or community, while holders are rewarded for being active in the community. As tokenomics develops, we are likely to see more token utilities and use cases that will continue to push the envelope of possibilities in project or community building.