Token vs Cryptocurrency: Understanding the Key Differences
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Tokens and cryptocurrencies are the two most common blockchain-based digital assets. The major difference between the two is that cryptocurrencies have their own blockchain, while tokens are built on an existing blockchain.
What is Token?
The term token refers to a special token of virtual currency, or how cryptocurrencies are called. These tokens represent fungible and fungible assets or utilities that reside on their respective blockchains.
Tokens, which can also be called crypto tokens, are units of value that blockchain-based organizations or projects develop on top of existing blockchain networks. While they often share deep compatibility with this network’s cryptocurrencies, they are an entirely different class of digital assets.
Cryptocurrencies are native assets of a particular blockchain protocol, while tokens are created by platforms built on top of these blockchains. For example, the native token of the Ethereum blockchain is ether (ETH). While Ether is the cryptocurrency native to the Ethereum blockchain, there are many different tokens that also use the Ethereum blockchain. Crypto tokens created using Ethereum include DAI, LINK, COMP, and CryptoKitties. These tokens can serve a multitude of functions on the platforms on which they are created, including participating in decentralized finance (DeFi) mechanisms, accessing platform-specific services, and even gaming.
There are several token standards commonly used to create crypto tokens, and most of them are built on Ethereum. The most widely used token standards are ERC-20, which allows the creation of tokens that are interoperable within Ethereum’s ecosystem of decentralized applications, and ERC-721, which is designed to enable non-interchangeable tokens that are individually unique and cannot be modified. As of 2020, there are hundreds of different ERC-20 tokens and thousands of ERC-721 tokens in circulation.
The number of different tokens will likely continue to grow at a remarkable pace as new tokens are developed to address blockchain’s expanding use cases.
Typically, crypto tokens are programmable and transparent. Programmable simply means that they run on software protocols consisting of smart contracts that outline the properties and functions of the token and the interaction rules of the network. It means that anyone without permission can join the system without needing special credentials. Distrust means that no single central authority controls the system; instead it operates on rules predefined by the network protocol. And finally, transparency means that the protocol’s rules and transactions are publicly visible and verifiable.
While crypto tokens can hold value and be exchanged like cryptocurrency, they can also be designed to represent physical assets or more traditional digital assets or a specific utility or service. For example, there are crypto tokens that represent tangible assets such as real estate and art, as well as intangible assets such as processing power or data storage space. Tokens are often used as a governance mechanism to vote on certain parameters, such as protocol upgrades and other decisions that determine the future direction of various blockchain projects. The process of creating crypto tokens to serve these various functions is known as tokenization.
As the blockchain industry continues to mature, the number of unique digital assets will only continue to grow based on the versatile needs of all ecosystem participants, from corporate partners to individual users. Given that creating new assets in the digital world is less restrictive than in the physical space, these digital assets are expected to improve the way countless industries operate, interact and generate value, thus enabling a wide range of new social and economic possibilities.
What is Digital Asset?
If you’re just getting started with blockchain and cryptocurrency, it’s crucial to understand the difference between digital assets, cryptocurrencies, and tokens. Although these terms are often used interchangeably, they differ in a number of key ways. Broadly speaking, a digital asset is an intangible asset that is created, traded and stored in digital form. In the context of blockchain, digital assets include cryptocurrency and crypto tokens.
Cryptocurrency and tokens are unique subclasses of digital assets that use cryptography, an advanced encryption technique that ensures the authenticity of crypto assets by eliminating the possibility of counterfeiting or double spending.
The main difference between the two classes of digital assets is that cryptocurrencies are native assets of a blockchain, like BTC or ETH, while tokens are created as part of a platform built on top of an existing blockchain, like many ERC-20 tokens. It runs widely on the Ethereum ecosystem.
What is Cryptocurrency?
A cryptocurrency is a blockchain network-native asset that can be traded, used as a medium of exchange, and used as a store of value. A cryptocurrency is issued directly by the blockchain protocol on which it runs, which is why it is often referred to as the native currency of the blockchain. In most cases, cryptocurrencies are used not only to pay transaction fees on the network, but also to incentivize users to keep the cryptocurrency’s network safe.
Cryptocurrencies typically serve as a medium of exchange or store of value. A medium of exchange is an asset used to obtain goods or services. A store of value is an asset that can be held or exchanged for a fiat currency at a later date without incurring significant losses in purchasing power.
Cryptocurrencies typically exhibit the following characteristics:
- Decentralized, or at least not dependent on a central issuing authority. Instead, cryptocurrencies rely on code to manage regulation and transactions.
- A blockchain or other Distributed Ledger that enables participants to enforce system rules in an automated, reliable way
- It is based on technology (DLT).
- It uses encryption to secure the underlying structure and network system of the cryptocurrency.
What is the Difference Between Cryptocurrency and Token?
Some of the key differences between digital token and digital token are:
• Digital coins are based on their native blockchain network, tokens are built on existing blockchain.
• Digital currencies can be used to process payments, but tokens are suitable for multiple needs.
• Digital currencies are more difficult to create than tokens that can be created based on existing blockchain, such as Ethereum.
• While digital currencies are mostly distributed through mining, tokens became popular through ICOs.