A utility token is a digital asset that is necessary to use in a blockchain ecosystem. The utility token is used to purchase a good or service. Utility tokens are used with decentralized applications (dApps).
A utility token is not mineable and is based on third-party blockchain. Thus, it should not be confused with a cryptocurrency such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Ripple (XRP), etc
First generation utility token
The first-generation of utility tokens are known as the “alt coin model”. It started in 2011 and at this time they are the primary utility tokens used. The most well-known utility token is ErC-20.
The value of a first-generation token is related to on-blockchain transactions and follows the law of supply and demand. That is, the more customers that use utility token the demand for the utility token increases as does the price for the utility token.
Second-generation utility token
The second-generation of utility tokens are known as the “exchange token model”. It started in 2017 when Binance issued its BNB token. Since then other cryptocurrency exchanges, such as Huobi (HT), Bitfinex (LEO), and OKEx (OKB) have issued their own tokens.
The owner of an exchange token gets special offers on the services received on the exchange such as discounts on exchange rates, reduced withdrawal fees, or first access to upcoming airdrops.
The value of a second-generation token is indirectly related to off-blockchain economic activity.
Third-generation utility token
The third generation of utility tokens are known as the “decentralized service model”. As of today, there are no third-generation utility tokens in operation.
The value of a third-generation token is related to on-blockchain economic activity. It is possible that this type of token will become very popular because its value is easily seen.
The table below shows the properties for the three generations of utility tokens.