It’s crucial not to mix up the phrases “cryptocurrencies” and “tokens,” as there are significant variations between the two.

Summary

Cryptocurrencies and tokens are the two most common blockchain-based digital assets. The main distinction is that cryptocurrencies have their own blockchains, whereas crypto tokens are created on top of an existing blockchain.

Contents

What Is a Digital Asset?

If you’re new to blockchain and cryptocurrency, knowing the distinction between digital assets, cryptocurrencies, and tokens is critical. While these phrases are sometimes used interchangeably, they differ in several important ways. Broadly speaking, a digital asset is a non-tangible asset that is created, traded, and stored in a digital format. Cryptocurrency and crypto tokens are examples of digital assets in the context of blockchain.

Cryptocurrency and tokens are unique subclasses of digital assets that utilize cryptography, an advanced encryption technology that assures the authenticity of crypto assets by eradicating the possibility of counterfeiting or double-spending.

The key differentiation between the two classes of a digital asset is that cryptocurrencies are the native asset of a blockchain — like BTC or ETH — whereas tokens are created as part of a platform that is built on an existing blockchain, like the many ERC-20 tokens that make up the Ethereum ecosystem.

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What Is a Cryptocurrency?

A cryptocurrency is a blockchain network’s native asset that may be traded, used as a medium of exchange, and stored of value. A cryptocurrency is often referred to as a blockchain’s native currency since it is issued directly by the blockchain system on which it runs. Cryptocurrencies are frequently used not simply to pay network transaction fees, but also to motivate users to maintain the cryptocurrency’s network security.

Typically, cryptocurrencies are used as a medium of exchange or a store of value. A medium of exchange is a financial asset that may be used to purchase goods or services. A store of value is an asset that may be held or exchanged for fiat currency at a later date without severe buying power losses.

The following are some of the most common properties of cryptocurrencies:

Built on a blockchain or other Distributed Ledger Technology (DLT) that allows members to automate and trustlessly enforce the system’s rules.
Decentralized, or at least not reliant on a central issuing authority. Instead, cryptocurrencies rely on code to manage issuance and transactions.
To secure the cryptocurrency’s fundamental structure and network technology, it employs cryptography.

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What Is a Token?

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

Tokens are developed by platforms that build on top of blockchains, whereas cryptocurrency is the native asset of certain blockchain technology. The native token of the Ethereum blockchain, for example, is ether (ETH). While ether is the Ethereum network’s native cryptocurrency, the Ethereum blockchain is also home to a variety of other tokens. DAI, LINK, COMP, and CryptoKitties are just a few of the Ethereum-based crypto coins. On the platforms for which they are designed, these currencies can be used for a variety of things, including participating in decentralized finance (DeFi) systems, accessing platform-specific services, and even playing games.

For creating crypto tokens, there are a number of commonly used token standards, most of which are based on Ethereum. ERC-20, which allows tokens to interact inside Ethereum’s ecosystem of decentralized apps, and ERC-721, which was developed to allow non-fungible tokens that are uniquely unique and cannot be interchanged with other similar tokens, are the most extensively used token standards. As of 2020, there are hundreds of different ERC-20 tokens and thousands of ERC-721 tokens in circulation. The number of distinct tokens will likely continue to rise at a surprising rate as new tokens are developed to satisfy blockchain’s expanding use cases.

Crypto tokens are typically programmable, permissionless, trustless, and transparent. They are programmable because they run on software protocols, which are made up of smart contracts that define the token’s characteristics and functionalities as well as the network’s rules of engagement. The term “permissionless” refers to the fact that anyone can use the system without requiring specific credentials. The term “trustless” refers to the fact that the system is not controlled by a single central authority and instead operates according to the rules set out by the network protocol. Finally, transparency requires that all parties may see and verify the protocol’s rules and transactions.

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Crypto tokens, like bitcoin, can store value and be traded, but they can also be designed to represent actual assets, more typical digital assets, or a specific utility or service. There are cryptocurrencies that represent physical assets like real estate and art, as well as intangible assets like processing power and data storage space. Tokens are also widely used as a governance tool for voting on certain parameters such as protocol upgrades and other decisions that determine the future course of different blockchain initiatives. Tokenization is the process of producing crypto tokens to serve these numerous functions.

As the blockchain industry matures, the number of distinct digital assets will only increase in order to meet the diverse needs of all ecosystem members, from enterprise partners to individual users. Because developing new assets in the digital world is less limiting than in the physical world, these digital assets are widely predicted to change the way various industries work, interact, and generate value, opening up a plethora of new social and economic possibilities.