What’s the Difference Between a Utility Token and a Security Token?

Web3 tokens are important aspects in the blockchain economy, but they aren’t all created equal.  

Two of the most widely discussed types are utility tokens and security tokens. If you’re interested in Web3 security, digital assets, and how the digital economy operates, then you must understand the difference between these two. 

What is a Utility Token and What Does it Do?

A utility token is a digital asset that grants you access to a product or service within a specific blockchain ecosystem. You can think of it as a “license” or a “key” that lets you use certain functions. This includes voting in a DAO, paying transaction fees on a network, or unlocking features in a dApp.  

Remember: It’s a web3 token that is not designed as an investment, and it doesn’t give you ownership in a company or project. 

Security Tokens in Web3

A security token is a web3 token that represents ownership or an investment interest in a real-world asset, project, or company. You can imagine it as stocks or bonds. Security tokens are subject to strict regulations (like securities laws in the US and EU) and may provide dividends, profit-sharing, or rights tied to the underlying asset. 

Web 3 Tokens Comparision: Utility vs. Security Tokens

Feature	Utility Token	Security Token
Main Purpose	Access to services/products in ecosystem	Investment/ownership in a company or asset
Regulation	Generally unregulated (can vary)	Strictly regulated as a security
Ownership Rights	None	Yes.
Examples	BAT, LINK, UNI	Securitize, RealT Property, company shares
Value Drivers	Usage, adoption, demand for service	Company performance, asset appreciation
Financial Returns	Not designed for profit or dividends	Can offer dividends or profit-sharing
Web3 Security Role	Access, utility in DeFi/dApps, voting	Compliant investment, bridges real assets
Market Liquidity	Often freely traded	Sometimes restricted by regulation

A few Things To Consider

• Utility tokens fuel blockchain applications: Example: Users spend LINK to operate Chainlink’s oracles or use BAT for Brave browser rewards. These tokens let platforms run efficiently and aren’t meant to represent an ownership stake. 

• Security tokens are closer to traditional finance: When you hold a security token, you’re holding a slice of an asset. This can be an equity in a property or business. Their value rises or falls with the asset’s performance and market movements. 
• Web3 Transparency & Security: Since security tokens are regulated, they offer greater transparency and protection for investors, but involve more paperwork and limits on who can buy or sell. Utility tokens offer more flexibility but carry fewer legal protections. 

How Web 3 Tokens Impact Blockchain & Digital Economy

Utility and security tokens both drive adoption and innovation in the digital economy and blockchain economy.  

• Utility tokens support everything from Web3 voting to NFT platforms, DeFi protocols, and user rewards.  

• Security tokens, meanwhile, are helping integrate traditional finance into Web3 by enabling compliant fundraising, fractional ownership, and global asset trading. 

FAQs

How do utility tokens and security tokens differ in terms of value? 

Utility tokens gain value through demand for the related service, while security tokens get their value from the actual asset or business performance they’re tied to. This includes the rise or fall of a company’s value. 

Why do security tokens require more legal steps than utility tokens? 

Security tokens must follow securities laws and pass official tests (like Howey Test in the US), to protect investors and make sure things are transparent and fair. Utility tokens, which aren’t classified as investments, usually face fewer legal steps. 

Can a token be both utility and security? 

In some cases, a token might start as a utility token, but if it acts as an investment or shares profit, regulators may classify it as a security token.  

 

To Sum This Up

• Utility tokens give you access to features, services, or perks within a blockchain ecosystem. They are like the “membership pass” for digital participation.  

• Security tokens represent an investment in a blockchain-based asset and often come with legal rights and protections.