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Digital assets: cryptocurrencies vs. tokens



SUMMARY


The two most common blockchain-based digital assets are cryptocurrencies and tokens. The biggest difference between the two is that cryptocurrencies have their own blockchains, while crypto-tokens are built on an existing blockchain.



CONTENT

  • What is a digital asset?

  • What is a cryptocurrency?

  • What is a token?



WHAT IS A DIGITAL ASSET?


If you are just getting started with blockchain and cryptocurrencies, it is important to understand the difference between digital assets, cryptocurrencies, and tokens. Although these terms are often used interchangeably, they differ in a number of important ways. Broadly speaking, a digital asset is an intangible asset that is created, traded, and stored in a digital format. In the context of the blockchain, digital assets include cryptocurrencies and crypto-tokens.


Cryptocurrency and crypto-tokens are unique subclasses of digital assets that use cryptography, an advanced encryption technology 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 the original asset of a blockchain - such as BTC or ETH - while tokens are created as part of a platform built on an existing blockchain, such as the many ERC-20 tokens that make up the Ethereum ecosystem.



WHAT IS A CRYPTOCURRENCY?


A cryptocurrency is the initial asset of a blockchain network that can be traded, used as a medium of exchange, and used as a store of value. A cryptocurrency is issued directly from the blockchain protocol on which it runs, which is why it is often referred to as the native currency of a blockchain. In many cases, cryptocurrencies are used not only to pay transaction fees on the network but also as an incentive for users to keep the cryptocurrency network secure.


Cryptocurrencies are usually used as a medium of exchange or store of value. A medium of exchange is an asset that is used to purchase 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 significant loss of purchasing power.


Cryptocurrencies usually have the following characteristics:

  • They are decentralized or at least not dependent on a central issuing authority. Instead, cryptocurrencies rely on code to manage issuance and transactions.

  • They are based on a blockchain or other distributed ledger technology (DLT) that allows participants to enforce the rules of the system in an automated, trustless way.

  • Uses cryptography to secure the underlying structure and network system of the cryptocurrency.


WHAT IS A TOKEN?


Tokens - which can also be called crypto-tokens - are units of value that blockchain-based organizations or projects develop on the basis of existing blockchain networks. Although they often have a high degree of compatibility with the cryptocurrencies of the respective network, they are a completely different class of digital assets.


Cryptocurrencies are the native asset of a particular blockchain protocol, while tokens are created by platforms built on top of those blockchains. For example, Ether (ETH) is the native token of the Ethereum blockchain. While Ether is the cryptocurrency based on the Ethereum blockchain, there are many other tokens that also use the Ethereum blockchain. Some of the crypto tokens that are based on Ethereum include DAI, LINK, COMP, and CryptoKitties. These tokens can perform a variety of functions on the platforms they are designed for, including participating in decentralized financial mechanisms (DeFi), accessing platform-specific services, and even gaming.


There are several widely used token standards for creating crypto tokens, most of which are built on Ethereum. The most widely used token standards are ERC-20, which enables the creation of tokens that are interoperable within the Ethereum ecosystem of decentralized applications, and ERC-721, which was developed to enable non-fungible tokens that are individually unique and cannot be exchanged with other similar tokens. As of 2020, there are hundreds of different ERC-20 tokens and thousands of ERC-721 tokens in circulation. As new tokens are developed to meet the growing use cases of the blockchain, the number of different tokens is likely to continue to grow at a remarkable pace.


Crypto tokens are typically programmable, permissionless, trustless, and transparent. Programmable simply means that they run on software protocols consisting of smart contracts that define the token's features and functions and the rules of the network. Permission-free means that anyone can participate in the system without requiring special credentials. Trustless means that no central authority controls the system, but that it operates according to the rules set by the network protocol. Finally, transparency means that the rules of the protocol and its transactions are visible and verifiable by all.


While crypto-tokens can have value and be exchanged like cryptocurrencies, they can also be designed to represent physical assets or more traditional digital assets, or a specific benefit 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 computing power or data storage space. Tokens are also often used as a governance mechanism to vote on certain parameters such as protocol upgrades and other decisions that set the future direction of various blockchain projects. The process of creating crypto tokens that perform these various functions is known as tokenization.


As the blockchain industry continues to mature, the number of unique digital assets will continue to grow in line with the diverse needs of all participants in the ecosystem, from corporate partners to individual users. As the creation of new assets is less restrictive in the digital world than in the physical world, these digital assets are widely expected to enhance the way myriad industries operate, interact, and generate value, enabling a host of new social and economic opportunities.

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