Cryptocurrencies are digital assets that can serve as a medium of exchange for projects in the blockchain ecosystem. The blockchain local currency is a coin, and similarly, the DeFi project and a decentralised app local currency is a token. Thus, crypto coins have their blockchain, while tokens do not have any.
Coins are used as a medium of exchange, to store value, and for transactions. While tokens are used for other purposes. An example of a blockchain in tokenisation is Grapherex. It is built upon the concept of web3.0 to create a modern secure crypto infrastructure with wide functionality.
Tokens are of different types, examples include; utility tokens, social tokens, governance tokens, and so on. This article will concentrate on governance tokens and utility tokens: what they are and their significant differences.
Both tokens are essential in the blockchain world and crucial to the future of the web3 ecosystem.
Utility tokens are digital assets that have their own benefits. They are designed for a specific purpose in a blockchain ecosystem. Utility tokens are not allowed on a native blockchain network, and their holders receive several benefits.
BNB is a typical example of a utility token. It grants users the right to perform some actions on a blockchain network or decentralized app. The holder of these tokens also has certain voting rights within the ecosystem.
In the traditional business world, the sole decision-making is taken by the key staff of such organisations, like shareholders, directors, or executives concerned. On the other hand, for decentralised autonomous organisations (DAOs), decision-making authorities are not consolidated into a single group.
They use a process involving community votes and suggestions to make decisions. Hence, it creates a voting system where token holders could determine the future of a decentralised protocol. The influence of a member in the voting system is determined by the number of tokens held.
It represents the ownership and voting rights in a decentralised protocol. The holder of the tokens has autonomy over the future direction of a protocol. Governance tokens are an essential feature for decision-making in DAOs, and can be used for other things like creating loans and staking.
Differences Between Governance Tokens and Utility Tokens
The key differences between governance and utility tokens are as follows;
- Governance tokens are crypto designed to provide holders with ownership in a fully decentralised protocol. Holders of this token can influence the protocol’s future direction while utility tokens are created for special functions within a crypto application.
- Governance tokens offer governance privileges to holders while utility tokens offer exclusive access rights to owners.
- The projects they relate to impact the value of governance tokens directly. Utility tokens are not directly correlated with the company’s current assessed valuation.
- It is challenging to violate the governance tokens’ proof of ownership, which comes with the guarantee of exclusive possession. On the other hand, malicious agents can develop phony or fraudulent ICOs and utility tokens with the express intent of compromising the user’s assets.
- Utility tokens are integrated into an existing protocol and used to access the services of that protocol while governance tokens fuel blockchain-based voting systems.
- The voting privileges of a token holder in a particular community, such as a DAO, are represented by governance tokens. The rights to unique goods, services, or experiences on the relevant network are represented by utility tokens.
In a myopic view of the discussed concept, think of a governance token as an advanced utility token. They are superior to utility tokens and are the central point of most DeFi projects. Holders of governance tokens can improve different aspects of a blockchain-based project.