What Are Utility Tokens? Basics of Utility Tokens in Crypto
Not every cryptocurrency token exists purely for speculation. Some tokens are designed with real utility, powering decentralized apps, rewarding users, or unlocking special features in blockchain ecosystems. These are called utility tokens, the workhorses of Web3 that make platforms function smoothly behind the scenes.
Before we get into details, let’s learn what makes utility tokens unique, how they work, and why they matter in the growing crypto space.
Utility Token Definition: What Is a Utility Token?
A utility token is a type of token—specifically a digital asset—that allows users to access a product or service within a blockchain-based ecosystem. Unlike security tokens, which represent ownership in a company or asset, utility tokens do not represent equity. Instead, a utility token provides access to specific services or features on a platform.
Utility tokens work as keys that let users participate in decentralized networks. They are common in dApps, crypto marketplaces, and DeFi projects. Holders can use tokens to pay for transaction fees, unlock premium content, or access unique platform services.
Examples of utility tokens include:
- Ethereum Gas (an ERC-20 token): used to pay for transaction fees when executing a smart contract.
- Binance Coin (BNB): the native utility token of the Binance ecosystem, used to pay for trading fees and launchpad access.
- Basic Attention Token (BAT): a token used within the Brave browser to reward creators and block ads.
Unlike security tokens, utility tokens are not designed as investments. They are often traded, giving them a market value, but their primary role is to provide real utility. This is why utility tokens are not subject to the same regulatory rules as securities.
As of early 2025, utility tokens make up nearly 22% of the global crypto market capitalization, with over $450 billion in active circulation, according to CoinMarketCap. This shows their increasing role in powering blockchain services rather than speculation alone.
Differences Between Utility Tokens and Security Tokens
Utility tokens are a type of cryptocurrency that serve a unique role. Unlike Bitcoin or Ethereum, which function as a medium of exchange, utility tokens are created to give access to specific services. For example, Filecoin’s native utility token lets users rent decentralized storage directly on its blockchain platform.
Projects often use utility tokens to incentivize participation. Users earn tokens for providing liquidity, validating transactions, or engaging with the community. At the same time, tokens can be used to purchase access to features. This dual role creates a feedback loop: the more people use the platform, the higher the value of utility tokens.
This is the key difference when comparing utility tokens and security tokens. Security tokens represent ownership in a company, while utility tokens provide access to specific services. Their legal status reflects this distinction—security tokens must comply with securities laws, but most utility tokens are not designed that way.
In 2025, regulators estimate that more than 35% of new token projects attempt to market themselves as utility tokens, but a significant share may still be reclassified as securities under the Howey Test.
How Utility Tokens Work
Utility tokens are digital assets programmed through smart contracts. These contracts define how a particular tokencan be used to access services, transferred, or spent.
Utility tokens are often issued as ERC-20 tokens or similar standards. The token standard ensures compatibility across wallets and exchanges. During an ICO (initial coin offering) or other token sales, a number of tokens are distributed to early adopters and investors.
When you interact with a dApp, the smart contract may:
- Check if you hold a certain amount of tokens.
- Deduct tokens used to pay for services.
- Record transactions securely on the blockchain.
Because tokens are subject to immutable code, auditing smart contracts is essential. Once deployed, the rules cannot be easily changed. This transparency builds trust but also adds risk if there are coding flaws.
According to a Messari 2025 report, over 65% of Ethereum-based dApps rely on utility tokens for at least one core function, highlighting how deeply integrated they are into Web3 applications.
Utility Token Business Model in Cryptocurrency
Token issuers create a digital token with blockchain tech to drive engagement and monetize services. These tokens are used to purchase products, access platforms, or support network activity.
The utility token business model relies on features like peer-to-peer payments, smart contracts, and revenue-sharing schemes. For example, Ripple has used this approach to expand its blockchain platform, holding back part of the token supply while circulating the rest to encourage usage. As token prices rise, companies profit while also boosting engagement.
This approach lets businesses bypass traditional capital markets, offering a crypto payment infrastructure that lowers costs and improves trust. By eliminating middlemen, companies can use tokens to interact directly with end-users, often in decentralized peer-to-peer environments.
By 2025, the global tokenization market reached $3.95 billion, with forecasts suggesting it will grow beyond $10 billion by 2029. Utility tokens represent a significant share of this market as businesses adopt blockchain-based payment systems.
Types of Cryptocurrency Tokens Compared
The crypto space is diverse, and tokens are not all the same:
- Utility Tokens: tokens provide access to specific services within a blockchain platform (e.g., BAT, LINK, MANA, VET).
- Security Tokens: security tokens represent ownership in a company or asset and are regulated like traditional securities.
- Payment Tokens: a type of cryptocurrency like Bitcoin or Ethereum, used only as a medium of exchange.
- Governance Tokens: allow token holders to vote on platform upgrades and rules.
In Q1 2025, payment tokens like Bitcoin and Ethereum still dominate, but utility tokens account for nearly 30% of all daily blockchain transactions.
Examples of Utility Tokens
Here are some examples of utility tokens that show their variety:
- BNB (utility token of the Binance ecosystem): used to pay for transaction fees, launchpad access, and DeFi interactions. In 2025, BNB processed more than $12 billion in daily trading volume.
- LINK (Chainlink): a token used to pay oracles that supply data to smart contracts. Chainlink now secures over $20 billion in total value locked (TVL) across DeFi protocols.
- FIL (Filecoin): token used to store and retrieve decentralized data. Filecoin surpassed 1.5 exabytes of storage capacity in 2025.
- SAND (The Sandbox): a token used to purchase virtual land, avatars, and gaming tools, with over 2 million active monthly users in 2025.
- BAT (Basic Attention Token): tokens for viewing ads and rewarding creators within Brave. Brave reports that over 65 million users now interact with BAT monthly.
Using Utility Tokens: Benefits
- Tokens can serve as gateways to platform features.
- Utility tokens allow users to engage in ecosystems without giving up equity.
- Token projects can raise funds through initial coin offering models.
- Buy utility tokens easily on exchanges with high liquidity.
In 2025, over 70% of DeFi protocols rely on a native utility token to function, and nearly 1 in 3 crypto wallets hold at least one utility token alongside Bitcoin or Ethereum.
Using Utility Tokens: Challenges & Limitations
- Legal status of utility tokens remains uncertain in many jurisdictions.
- Utility tokens are often at risk of being reclassified as securities.
- Tokens often have poor user experiences due to complex wallet handling.
Integration with traditional finance systems is limited.
- Tokens must be secured—hacks and bugs in smart contracts can lead to losses.
In 2025, cyberattacks targeting DeFi and token projects caused over $2.2 billion in reported losses, highlighting security as a critical challenge.
Utility Token Value: What’s a Utility Token Worth?
Two disclaimers: this is a simplified overview, not financial or legal advice. Tax rules and crypto regulations evolve, so outcomes may change.
Using Utility Tokens as Compensation
Many token issuers distribute tokens to employees or contractors. In the U.S., the IRS considers them property under Section 83, meaning recipients recognize income equal to the market value of the utility token used at the time of grant.
Valuation Factors for Utility Tokens
- Objectively determined value: when a specific utility exists and a token supply with set prices is available, valuation is straightforward.
- Subjective valuation: when services are in development or tokens issued lack pricing clarity, values are harder to determine.
Tokens Are Subject to Vesting: Risk of Forfeiture
If tokens are subject to vesting, recipients don’t recognize income until vested. By filing Form 83(b), they can elect to pay taxes upfront at discounted token prices. This avoids higher taxes if the value of utility tokens grows later.
Conclusion on Using Utility Tokens
Utility tokens often sit at the heart of crypto ecosystems. They make platforms work, give real utility, and create ways for users to participate directly. But just like utility tokens and security tokens, their treatment depends on their function and legal status. While utility tokens are not designed as investments, they are crucial for growth in the blockchain world.
By 2025, the number of active wallets interacting with utility tokens surpassed 220 million globally, making them one of the most widely adopted categories of digital assets.
