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At first glance, the world of cryptocurrencies can seem challenging for new investors due to the particular concepts of this market.
One of the most basic concepts is understanding the difference between cryptocurrencies and digital tokens. While these two terms are often used interchangeably, they refer to two different concepts in the crypto ecosystem.
Continue reading the article to understand the fundamental differences between cryptocurrencies and tokens.
What is a cryptocurrency?
Coins refer to cryptocurrencies built on its independent blockchain network. The most famous example is Bitcoin (BTC), which is also the largest cryptocurrency in the world by market capitalization.
Bitcoin is powered by its native blockchain network. Similarly, Litecoin (LTC) and Ethereum (ETH) work on their respective blockchains. These blockchains can differ in size, rules, miners, performance and other components.
Some of the popular coins are Bitcoin (BTC), Ripple (XRP), Ethereum (ETH), Dogecoin (DOGE) and Litecoin (LTC).
How are cryptocurrencies used?
Cryptocurrencies are designed to serve the same purpose as physical currencies: transferring value.
Thus, digital currencies allow the transfer of payments and store value directly linked to their demand and supply. Therefore, the value of digital currencies is often volatile.
In the case of Bitcoin, the only way to get more coins is to buy or mine them, you can also accept Bitcoin as a payment method.
What is a digital token?
Tokens refer to cryptocurrencies that do not have their own blockchain network. Instead, these cryptocurrencies are built on top of another blockchain.
Users can create digital tokens using one of the many platforms in the DeFi (Decentralized Finance) ecosystem.
Ethereum is one of the most popular choices thanks to its support for smart contracts. Most digital tokens found today are ERC-20 tokens, as the Ethereum platform allows you to easily create tokens on its blockchain.
Currently, there are thousands of tokens on the market. Tether (USDT), USD Coin (USDC), DAI, UMA and Basic Attention Token (BAT) are some of the commonly used digital tokens out there. These tokens may have other possibilities besides transferring value.
How are digital tokens used?
Like cryptocurrencies, tokens also allow the transfer of value. However, in most cases, a digital token has some additional features than just being a means of payment.
Anyone can create digital tokens to fulfill specific functionalities.
For example, the privacy-focused Brave browser uses the Basic Attention Token (BAT) to reward its users for surfing the web. Customers are paid in BAT when they view ads for businesses that partner with their browser.
There are different types of digital tokens for different purposes.
- Security tokens act as proof of investment in real-world assets such as stocks and fixed income. They are issued during the Security Token Offering (STO).
- Utility tokens are designed to provide access to a certain service or product. For example, the FIL token is used to access the Filecoin platform.
- Asset tokens are digital tokens tied to real-world assets such as real estate, gold, and more. In this case, a token represents real-world investment.
- Stablecoins are digital tokens with a fixed value. They are often pegged to fiat currencies like USD or EUR.
- Non-fungible tokens (NFT) represent unique items, which can be real or virtual. Items used in a game are an example of these tokens.
- Payment tokens are almost similar to digital currencies in that they allow a payment transfer in exchange for goods and services.
Some services also create payment tokens to bypass the middlemen. In most cases, the customer would be rewarded for using these tokens instead of a traditional payment method.
Compared to building a cryptocurrency from scratch, creating a token through the Ethereum platform would take much less time.
Cryptocurrencies vs. Digital Tokens – The main differences
Some of the main differences between a digital token and a digital currency are as follows:
- Digital currencies have their blockchain network, but the tokens are built on top of an existing blockchain.
- Digital currencies can be used to process payments, but tokens can be suitable for a variety of needs.
- Digital currencies require more effort to create than tokens that can be built on top of existing blockchain like Ethereum.
- Digital currencies are mainly distributed through mining, while tokens have become popular through ICOs (Initial Coin Offerings).
Approaching the cryptocurrency market is a challenging task, but understanding the basic distinction between the various types of cryptocurrencies can help you manage risk and make better decisions in a volatile ecosystem.
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