The difference between cryptocurrencies and tokens

The difference between cryptocurrencies and tokens

The cryptocurrency market is developing rapidly. Good projects are starting to show their value and more and more people are starting to get interested in crypto. 2020 will be the year of DeFi, which stands for decentralized finance. DeFi is a new monetary system that is being built on public blockchains. Most projects that build on public blockchains use tokens. Some people confuse cryptocurrencies with tokens. It is about time we explain the difference between cryptocurrencies and tokens in a simple way.

In the current cryptocurrency market most coins or tokens are regarded as cryptocurrencies, even if most of the coins do not function as a currency or medium of exchange. In this sense the term cryptocurrency is wrong because a “real” currency technically represents a unit of account, a store of value and a medium of exchange. In the cryptocurrency world however, most coins are still considered a currency and therefore it is most easy to stick with this.

Cryptocurrencies are generally categorized in:

(Alternative) Cryptocurrency Coins

Generally altcoins are all coins other than bitcoin. A lot of altcoins are a variant (fork) of bitcoin. This means that the original bitcoin protocol was used and changed to create a new coin with its own features. A couple of well-known bitcoin based coins are litecoin, namecoin and dogecoin.

There are also entirely new altcoins that have created their own blockchain and protocol that support its own native currency. Well know examples of this are Ethereum, Ripple, Nxt and Cardano.

It is important to mention that all altcoins have their own independent blockchain where translations relating to their coins occur in.

Tokens

A token represents a particular asset or utility that is usually residing on top of another blockchain. A token can be any asset that is tradeable and fungible. Since a token is created on an existing platform like Ethereum, the creation of tokens is relatively easy. The functionality of creating tokens is possible through the use of smart contracts.

Tokens are created and made available through a so called initial coin offering. The ICO which is comparable with an IPO, is meant to bring funds together to fund projects and start-ups. In the last years we have seen a boom in ICO’s.

A couple of well-known tokens are Chainlink, Compound and Maker.

Just keep in mind that the biggest difference between altcoins and tokens are their structure. Coins are separate currencies with their own blockchain. Tokens operate on top of a blockchain that facilitate the creation of decentralized applications.

At the moment almost all tokens are built on Ethereum. At the time of writing Ethereum is struggling with its transaction speed and costs, and the delayed implementation of a Proof of Stake consensus protocol. The most promising project to take Ethereum’s place in the long run is Cardano.

Having some cryptocurrencies in a diversified investment portfolio will become standard in the future. Research shows that especially the younger generations (millennials) would rather invest in cryptocurrencies than in traditional means of investing such as stocks. To be able to hold cryptocurrencies you will need an account with a cryptocurrency exchange. Make sure only to use big well known exchanges such as Binance. Binance is the world’s largest crypto exchange. By using this link you will receive a 10 percent discount on all trading fees.

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