Utility tokens, and why the label proves nothing

Every project calls its token a utility token. The label is close to meaningless, and it is worth understanding why.

What the label claims

The pitch is that this token is not a speculation, it does a job. It pays fees, or unlocks access, or grants a vote.

That claim does carry some weight. A thing with genuine use is easier to establish as property, and a token doing real work has a reason to exist beyond being resold to somebody else.

Why it proves so little

Aave's token has genuine, working utility. Holders govern the protocol and can stake it into a safety module that backstops the system. It functions exactly as advertised.

It fails our screen anyway.

The reason is simple once you see it. Utility tells you the token does something. It does not tell you whether that something is permissible. Aave's utility is governing an interest rate market.

The two questions

Is the utility real? Can you name the thing this token does, today, that could not be done without it? A roadmap promising future ecosystem utility is not utility.

Is the business permissible? If the protocol earns from lending at interest, from gambling, or from any prohibited activity, the token inherits that regardless of how well it works.

Most tokens fail the first question. A meaningful number pass it and fail the second.

Governance is not automatically utility

A vote over a permissible protocol is a real function. A vote over an interest rate market makes you a participant in setting those rates.

How to check in five minutes

Find the project's documentation and look for the page describing what the token is for. If that page talks only about governance, staking rewards and future utility, you have found a token with no present function.

Then find out where the protocol's revenue comes from. If the answer is a spread on trades, that is a fee for a service. If the answer is the difference between what borrowers pay and what depositors receive, that is an interest margin, and the verdict follows from it no matter how the token behaves.

In one line: utility has to mean the token does something necessary, inside a business that is itself permissible, and the label alone establishes neither.