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Cryptocurrencies vs. Tokens

What is a Digital Asset?

If you’re new to blockchain and cryptocurrency, it’s critical to understand the distinctions between digital assets, cryptocurrencies, and tokens. While these terms are frequently used interchangeably, they differ in several important ways. In general, a digital asset is a non-tangible asset that is created, traded, and stored digitally. Digital assets in the context of blockchain include cryptocurrency and crypto tokens.

Tokens and cryptocurrency are distinct subclasses of digital assets that employ cryptography, an advanced encryption technique that ensures the authenticity of crypto assets by eliminating the possibility of counterfeiting or double-spending.

The key distinction between the two types of digital assets is that cryptocurrencies, such as BTC or ETH, are native assets of a blockchain, whereas tokens are created as part of a platform built on an existing blockchain, such as the many ERC-20 tokens that comprise the Ethereum ecosystem.

What is a Cryptocurrency?

A cryptocurrency is a blockchain network’s native asset that can be traded, used as a medium of exchange, and stored as value. Because a cryptocurrency is issued directly by the blockchain protocol on which it runs, it is frequently referred to as a blockchain’s native currency. In many cases, cryptocurrencies are used not only to pay network transaction fees but also to incentivize users to keep the cryptocurrency’s network secure.

Cryptocurrencies are frequently used as a medium of exchange or a store of value. A medium of exchange is a financial asset that is used to purchase goods or services. A store of value is an asset that can be held or exchanged for fiat currency at a later date without suffering significant purchasing power losses.

Cryptocurrencies are known to have the following characteristics:

  1. Decentralized, or at the very least not reliant on a centralized issuing authority. Cryptocurrencies, on the other hand, rely on code to manage issuance and transactions.
  2. Built on a blockchain or other Distributed Ledger Technology (DLT), which enables system participants to enforce system rules in an automated, trustless manner.
  3. Cryptography is used to secure the underlying structure and network system of the cryptocurrency.

What is a Token?

Tokens, also known as crypto tokens, are units of value created by blockchain-based organizations or projects on top of existing blockchain networks. While they frequently share deep compatibility with the network’s cryptocurrencies, they are a completely different digital asset class.

Tokens are created by platforms that build on top of blockchains, whereas cryptocurrency is the native asset of a specific blockchain protocol. Ether, for example, is the native token of the Ethereum blockchain (ETH). While ether is the cryptocurrency native to the Ethereum blockchain, the Ethereum blockchain is also used by a variety of other tokens. Among the Ethereum-based crypto tokens are DAI, LINK, COMP, and CryptoKitties. These tokens can be used to participate in decentralized finance (DeFi) mechanisms, access platform-specific services, and even play games on the platforms for which they are designed.

For the creation of crypto tokens, there are several widely used token standards, the majority of which are built on top of Ethereum. ERC-20, which allows the creation of tokens that can interoperate within Ethereum’s ecosystem of decentralized apps, and ERC-721, which was designed to enable non-fungible tokens that are individually unique and cannot be interchanged with other similar tokens, are the most widely used token standards.

There are hundreds of different ERC-20 tokens and thousands of ERC-721 tokens in circulation as of 2020. As new tokens are created to address blockchain’s expanding use cases, the number of different tokens is expected to grow at an astonishing rate.

Crypto tokens are typically programmable, permissionless, trustless, and transparent. Programmability simply means that they run on software protocols, which are made up of smart contracts that outline the token’s features and functions as well as the network’s rules of engagement. Permissionless means that anyone can use the system without needing special credentials. The system is trustless because no single central authority controls it; instead, it operates according to the rules defined by the network protocol. Finally, transparency implies that the protocol’s rules and transactions are viewable and verifiable by all.

While crypto tokens, like cryptocurrency, can store and exchange value, they can also be designed to represent physical assets, more traditional digital assets, or a specific utility or service. For example, there are crypto tokens that represent both tangible assets like real estate and art and intangible assets like processing power or data storage space. Tokens are also frequently used as a governance mechanism, allowing users to vote on specific parameters such as protocol upgrades and other decisions that influence the future direction of various blockchain projects. Tokenization refers to the process of creating crypto tokens to serve these various functions.

As the blockchain industry matures, the number of unique digital assets will only increase to meet the diverse needs of all ecosystem participants, ranging from enterprise partners to individual users. Given that creating new assets in the digital world is less restrictive than in the physical realm, these digital assets are widely expected to improve the way countless industries operate, interact, and generate value, enabling a plethora of new social and economic possibilities.

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