In the GameFi scene, you often hear about utility tokens and governance tokens. What is the difference between these two tokens?
Most new players to the blockchain game often wonder “why do they have to make everything so complicated?”. A common misconception that some transitioners think when they first get into NFT gaming is that the game economy should be easy.
You should be able to simply play a game, earn a token, and sell that token for cash. Sounds easy, right? But this model is a recipe for disaster. If every player does, the token drops to zero, the game dies, and a puppy in your neighborhood goes an evening without food.
Therefore, GameFi games had to come up with complicated symbolic structures to survive. This means that some games have two (and even three!) tokens.
- utility tokens?
- governance token?
- bonus token?
“We don’t care, we just want to play!”
Take it easy. It may seem complicated at first, but when you break it down, everything is very simple. Therefore, in this article we will look at the differences.
coin versus token
What is a coin?
In the crypto world, coins refer to the currency of a blockchain. For example, Ether, SOL, and Bitcoin are coins. These are the main currencies of cryptocurrencies. Usually, you have to buy one of these coins on a crypto exchange to get started with GameFi.
What is a token?
The tokens are everything else:
- A game’s utility token
- A governance token
- All other altcoins
Think of tokens as a sort of secondary currency in the crypto world. Typically, to get started with GameFi, you need to exchange a blockchain coin for a game token on a DEX.
What is the ERC?
If you dig deeper into tokens, ERC is basically the ERC standard. You’ve probably seen this acronym in white papers or on Twitter. It is usually accompanied by a number such as:
It may sound complicated, but don’t let the enigmatic combination of numbers and letters fool you. ERC standards are easy to understand if you think of them as games.
ERC-20 tokens are also called fungible tokens. It is a fancy expression which means that each token is equivalent to another token of the same type.
For example, each $MANA in Decentraland is worth the same as any other $MANA.
In contrast, ERC-721 tokens are non-fungible tokens. They are better known as NFTs. For example, Bored Apes are ERC-721 tokens. Therefore, not all Bored Ape NFTs are worth the same.
Utility versus governance: the ultimate battle
Utility Tokens – In general, utility tokens in GameFi have in-game utility and value that can be traded externally. This means that you usually get the utility token for in-game actions and can use it to buy a useful in-game item or sell it on a market.
governance tokens – They often give you the right to vote and allow you to participate in the decision-making processes of a game. Sometimes they have the prefix “ve” which means “Vote Escrowed”. In simple terms, this means that the longer you bet on this token, the more rewards or voting rights you have.
(In case you were wondering: utility tokens and governance tokens are ERC-20 tokens).
How Utility and Governance Tokens Work in GameFi
In most P2E games, you receive a utility token for completing in-game quests and tasks. With the token you earn, you can sell it on the open market for cash, or you can use to purchase an upgraded weapon or item.
However, the introduction of Governance Tokens expands the possibilities you have with your rewards. You can use your utility token to earn your governance token. With Governance Tokens, you can vote on future changes to the game and thus have a say in the future development of the game.
Don’t let the acronyms fool you. ERC standards are easy to understand and tokens can be learned by interacting with the game. The more familiar you are with the types of tokens in the game, the more likely you are to enjoy lucrative gaming opportunities in the future.
Edmond is a passionate writer of video games, GameFi and Web3. He has worked for major GameFi companies and gaming/crypto news websites.