Initial coin offerings (ICOs) — sometimes called token generation events (TGEs) — are fundamentally changing the nature of early seed fundraising, and they have the potential to alter the mainstream investment ecosystem itself. Through ICOs, start-ups can raise capital by issuing crypto tokens on a blockchain, most commonly that of Ethereum, and sell them to investors or contributors.
Like cryptocurrencies, tokens are fungible and tradable, but they are also unique in that their value is derived from something they represent, such as company equity or access to a service — not their utility as a currency or store of value. Two common types of ICO coins are equity tokens and utility tokens.
Equity Tokens
Equity tokens are a subcategory of security tokens that represent ownership of an asset, such as debt or company stock. By employing blockchain technology and smart contracts, a startup could forgo a traditional initial public offering (IPO) and instead issue shares and voting rights over the blockchain. Additionally, a lender could create tokens that represent debt owned by the company, enabling loans to be bought and sold in a high-liquidity environment.
Utility Tokens
Utility tokens, often called app coins or user tokens, provide users with future access to a product or service. Through utility token ICOs, startups can raise capital to fund the development of their blockchain projects, and users can purchase future access to that service, sometimes at a discount off the finished product’s sticker price.
Utility tokens are not designed as investments; however, many people contribute to utility token ICOs with the hope that the value of the tokens will increase as demand for the company’s product or service increases.
Simply put, while both equity and utility token prices may fluctuate, the key difference is that equity tokens entitle the holder to ownership rights, while utility tokens function as coupons and do not provide holders with an ownership stake in a company’s platform or another asset.
