Security tokens are something most people know nothing about. This is about to change after you have read this blog. Tokens are electronic equipment that can be used to authenticate and represent one’s ownership in the Blockchain community.
This can be used to enter the network and access the restricted areas of the network. You may find different security tokens, in the form of USB chips and ports, or wireless Bluetooth ones. Tokens cannot exist outside a platform, unlike cryptocurrencies like Bitcoin.
These tokens are released by developers during an ICO (Initial Coin Offering). ICO’s are similar to crowdfunding, but for the cryptocurrency community. If anyone wants to buy a token, he or she will send a particular amount of currency (Ether) to the seller.
Similarly, if you want to invest in a project, you can buy these tokens for that. After the payment is received, you will have access to these tokens. Usually, two types of tokens are available; utility and security.
If a token passes the Howey Test, it belongs to the security category, otherwise it is a utility token. What is the Howey Test? Here the focus is given on the fact if the value of a transaction depends on the other party’s work or not. Other tests can be used for this purpose too.
Utility tokens can be used to get a product or service, either by trading or exchanging them. People are authorized to enter, engage (vote), and use the cryptocurrency network.
An example of this would be Monero XMR, as it can be used for transactions. Other examples would be Ether and Sia.
Now, let’s come to security tokens which will pass the Howey Test. These tokens don’t have their own value, rather they have derived it from an external asset. It should be noted that this asset should be tradeable.
Another important aspect is that these tokens are governed by federal securities and regulations. So, when you enter an ICO, make sure it follows all the concerned rules, otherwise get out. Security tokens can be keycards and other similar electronic devices or gadgets.
Security tokens offer benefits, and they are mentioned below:
These tokens can provide a sense of credibility and accountability to ICOs. This is needed because ICO’s reputation has suffered a bit, after some legal issues. Traditional finance can be boosted using these tokens. The middleman will be cut off, and the processing fees associated with it.
Tokens will reduce complexities, and speed up the entire process. This is why they are considered as a lucrative investment option. A newbie investor will have access to the free market using these tokens.
A lot of investors choose this option, so, it’s quite popular. With time, it will see updates in terms of technology, like smart contracts. It will reduce the chance of institutional manipulation to quite some extent. Lastly, it will increase the chance of liquidation on trading platforms.
How value is assigned to these tokens?
Experts focus on three concepts while assigning a value:
- Right- Improved engagement
- Value exchange- Creating economic transactions
- Toll- Game
- Function- Improve the user experience
- Currency- problem-free transactions
- Earnings- distribution of benefits