What are Utility tokens
Unlike coins which own their blockchain, most tokens run on a blockchain that is already in place. Tokens are usually used as a payment method for services. Although blockchain terminologies seem complicated they aren't as complicated as we perceive them to be. A utility tokens is a special kind of token that helps in capitalizing or financing projects for startups, companies or project development groups (bit2me.earn). These tokens give holders future access to company product but not entirely guaranteed. These tokens do have value but not in the same way we view coins or money. They are used as a strategy to obtain finance in the crypto space.
Usually, when a tech startup develops a digital product or service, they initiate an Initial Coin Offering(ICO). During this period they sell utility tokens which investors can buy as a means of payment on their platforms. One could liken them to coupons or vouchers that are exchanged after a certain time period for access to certain product and services. The asset a utility token represents is a certain level of access to a product or service which the holder can gain by redeeming it and sometimes they work like reward points. For example, you can exchange Ether for access to DApps or to execute smart contracts on the Ethereum blockchain (Metaco). ICOs offer tokens of their startups in exchange for fiat coins or cryptocurrencies that will assist their development. The value of these tokens are determined by the company but sometimes due to hype and speculations may change over time. These factors make them a very risky form of crypto investment.
Many people invest in utility tokens due to the difference in the purchase price of the utility tokens during ICO. They are much lower than the final price they are eventually sold for and also the major reason they have been gaining popularity. Till date ERC-20 on the Ethereum network is by far the most popular standard for creating utility tokens. There are other utility tokens like Basic Attention Token (BAT) and Golem (GNT). Although utility tokens might seem like a good investment one has to be indeed careful because they are largely unregulated and so many things could go off which no one would be held accountable. This makes it a great target for scammers and fraudsters to operate.
These fraudsters pose as great developers while promising unattainable heights all in an effort to rope as much investors in. Some even go as far as claiming they have backing from top crypto exchanges or even top Crypto figures. Due to inability to learn or make research, many unsuspecting investors buy in thinking they have hit the jackpot when they are actually the pot. Another risk with utility tokens is the fact that many might not reach their proposed target. Just like the ICO boom in 2017, atleast 40% of these projects made initial offerings that didn't meet their funding target or didn't gain traction and so became totally valueless. This can be attributed to their unattainable goals as there were no natural mechanism to increase their value and so eventual failure was certain.