Types of Digital Assets: The Differences Between Cryptocurrency and Tokens
Plenty of crypto community members uses the terms “crypto” and “token” like they are the same thing. Even though they are both types of digital assets built with the help of decentralized technologies, there are several significant differences.
Understanding these distinctions is essential if you’re going to actively engage in anything crypto-related, including trading, holding, and more.
What Cryptocurrency Stands For
A cryptocurrency is a digital currency that’s not controlled by a central authority. So far, we’ve been using fiat money (dollar, euro, pound, etc.), which are all controlled by their respective governments.
Blockchain has brought about a change. Thanks to it, a new type of digital money was created: decentralized. This made transactions faster and more affordable, as there were no intermediaries slowing down the process. The original cryptocurrency is bitcoin, which is still the world’s leading digital asset.
One can either buy cryptocurrency using a cryptocurrency trading platform such as an exchange or P2P marketplace or mine it, whereby you’re rewarded for dedicating your computing power to run the decentralized blockchain network. Most people nowadays choose to get digital assets via an exchange. Should you decide to purchase crypto through exchange platforms, it’s important to find a secure, legal and reputable website.
Nowadays, you can use popular cryptocurrencies to buy goods and services, as many companies have started accepting them. In other words, cryptos are available for much more than just trading and holding them.
What Token Means
Tokens are built on other blockchains and usually serve a concrete purpose. For example, Ethereum allowed many developers to build their decentralized applications. Each dApp can have an ecosystem of its own with a unique token that is used within it. If the token is used to buy goods or services offered by the business or startup that created it, it’s usually referred to as a utility token.
All tokens that are built on top of the Ethereum blockchain must follow certain rules and regulations compiled by Ethereum developers, with ERC-20 being the most popular.
Tokens can also be a representation of a physical asset, or even a utility or service. They are often combined with smart contracts, a type of contract written in code that is self-executed once both sides reach an agreement.
Tokens can also be purchased and traded on exchanges, and you can choose to invest in tokens as a possible way to make a profit.
Finally, we should discuss the popular form of tokens called non-fungible tokens, which are usually just referred to as NFTs. So, what does “non-fungible” actually mean? Essentially, it implies that each token is unique and cannot be used interchangeably with other units of non-fungible tokens.
What Is the Main Difference?
Let’s take a quick overview of how cryptocurrencies and tokens differ.
Cryptocurrencies are basically a type of digital currency. They’re used much like fiat money. Tokens, on the other hand, represent assets and deeds and are not always considered money. Moreover, they are often used to buy various goods or services in a specific business that created the tokens.
Principle of Work
Cryptos operate on blockchain, and many digital currencies have a blockchain network of their own. For example, BTC works thanks to its Bitcoin network, which is based on a distributed ledger.
Tokens aren’t essentially created with the help of a blockchain directly. Instead, they are built on top of blockchain-based protocols that allow building tokens based on smart contracts.
Since tokens often represent real-world assets, it means that token transactions may involve physical movement from one place to another. For example, when trading NFTs, a manual change of ownership is often required after you purchase these one-of-a-kind items. On the other hand, nothing moves with cryptocurrency (coin) transactions. The only thing that changes is your account balance.
Cryptocurrency coins serve as digital money. That’s their primary purpose. You can trade them with other cryptos, invest by buying them or use them to purchase products. Still, the primary functionality of coins is a means of payment, just like fiat currencies.
Tokens are used in various ways, like, for example, investing in various startups. Some tokens can be staked so that you get to play a part in governing a certain business, or you can utilize them to get access to a service or product.
What Is Important to Remember
Cryptocurrencies (coins) and tokens are both parts of the blockchain family and are the two most common types of digital assets. However, a token has much more functions than a coin, as the latter is mainly used as money. Both cryptocurrencies and tokens have a value that can go up and down based on various factors, such as supply and demand, but tokens aren’t considered to be money.
Hopefully, if you want to start trading cryptos or tokens, you now have a better understanding of the difference between the two, as that can be beneficial for your investing system or trading strategy.