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What is the difference between cryptocurrencies and tokens?

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There are various blockchain-based digital assets in the market however Cryptocurrencies and tokens possess the largest market share of the cryptocurrency ecosystem. A majority of times these terms are used interchangeably however there are various underlying differences associated with these terms.

Before understanding the bifurcation between cryptocurrency and tokens we should take a look at the term “Digital assets”.

A digital asset is an umbrella term that encompasses cryptocurrency as well as tokens. A basic definition of a digital asset is that it is a non-tangible asset that is created, traded as well as stored only in a digital format. Digital assets include cryptocurrency and tokens.

Digital assets consist of two subclasses ie. Cryptocurrency and tokens utilize cryptography to eradicate various errors such as counterfeiting etc.

What is a Cryptocurrency?

The native asset that belongs to a particular blockchain network that can be utilized for trading, as well as a medium of exchange, is cryptocurrency. The cryptocurrency is issued by the blockchain protocol which runs it therefore users consider cryptocurrency as the blockchain’s native currency.

The majority of networks utilize cryptocurrencies not only as a medium of exchange but also as a mechanism to incentivize users on its platform who have contributed to keeping the network secure.

Cryptocurrencies are typically referred to as “medium of exchange” or “store of value”. An asset becomes a medium of exchange when the asset can be easily utilized to gain goods or services. Similarly, an asset turns into a store of value when the asset can be used to hold or exchange for a fiat currency.

The typical characteristics of a cryptocurrency are as follows:

  • Decentralized – Cryptocurrency doesn’t depend on a central entity. It runs on code that manages the transactions of the cryptocurrency.
  • Security – The security of a cryptocurrency directly relies on cryptography. The basic functionality of cryptography is that it secures the overall underlying structure as well as the network of the cryptocurrency.

What is a digital token

A basic definition of a “digital token” is that it is a unit of value that various blockchain-based projects ideate on top of an existing blockchain network. Although a majority of times digital tokens share deep compatibility with various cryptocurrencies associated with the particular blockchain network they are however a wholly different asset class.

Tokens contrast cryptocurrencies because they aren’t native to the blockchain; instead, they are created by various platforms and are built on top of such blockchains. A very basic example is as follows. The blockchain Ethereum possesses a native token Ether ie. ETH. Therefore Ether is the native token associated with the Ethereum blockchain however various other tokens have been built on the Ethereum blockchain. An example of Crypto tokens built on the Ethereum blockchain is DAI, LINK, and Cryptokitties. Tokens are created with customized functions and can be used for a multitude of functionalities. Some of the primary uses of tokens are the Decentralized finance (DeFi) mechanisms or for accessing services that are specific to any particular platform.

The basic features associated with crypto tokens are as follows

  • Programmable – A crypto token runs on a particular software protocol. These protocols are composed of various smart contracts. These smart contracts outline various features and functions of the associated token as well as various rules of engagement associated with the crypto token.
  • Permissionless – Any entity can be a part of a crypto token. There are no specific entry barriers because there is no requirement for any specific credentials to be a part of a crypto token.
  • Trustless – This simply means that to run a crypto token there isn’t any centralized entity associated with the token.
  • Transparency – The various rules and regulations associated with a crypto token aren’t secretive and can be viewed by any entity.

Crypto tokens are utilized not only for holding value or exchanging. They are utilized for a range of functions such as representing a particular traditional asset or any specific utility purpose or service. Apart from this, tokens are also used for various governance mechanisms such as voting for specific purport or deciding the future of the blockchain project.

Disclaimer: The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. Please do your own research.