Recently, the term “cryptocurrency token” has been widely used. Its use can be misleading, pointing to the same meaning with the “cryptocurrency”. In fact, these two terms have similarities, but there are also fundamental differences.
What is cryptocurrency?
Bitcoins and altcoins are created on the basis of blockchain technology. Each of the public decentralized systems uses its own internal monetary unit. This is the cryptocurrency.
The only way to issue it is mining. The work of public blockchain requires the creation of blocks. It is for this that the miners receive rewards in the form of a cryptocurrency. It can be used, if desired, as a payment, having made the necessary transaction, or exchanged for the usual fiat money.
Thus, we can say that the cryptocurrency carries out the following tasks.
- Stimulates mining.
- Provides calculations within the public blockchain.
- It is a participant of transactions.
An important difference between the cryptocurrency and any other assets is that the program code of the monetary system is an issuer, and the generation of digital money is the result of the work of the pledge protocol.
What is token?
By its very essence this is a debt obligation. The tokens can be issued by a physical or legal entity. This is a fundamental difference from the cryptocurrency. This happens, as a rule, within the framework of ICO-projects (a special type of crowdfunding, when users buy a monetary unit of a project for a minimum price, thereby supporting its development).
The issue of tokens is, in most cases, limited, and they can perform different functions.
- Private monetary unit.
- The key to ensure the identification of the holder and his information security.
The second function is extremely beneficial. They have some similarities with API-keys. For example, the ETH token provides its holder with access to the decentralized Ethereum network computing system. There are also private keys; holding them you can get the whole network of monetary units.
Since tokens have benefits, they can be traded, exchanged for cash. This gives them value. Hence, the cryptocurrency itself can be considered a kind of a token, but with special properties.
It is possible to compare this monetary unit with shares. Acquiring them, the owner expects to receive a certain product or service, a percentage of the total capitalization, and the seller agrees to provide this on predefined conditions. Therefore, the token acts as a contract and a debt obligation.
An example of everyday life can be a subway ticket or a coupon for a free lunch in a restaurant. Hence it becomes clear that the purpose of this element is to grant special rights to its holder.
Functions of cryptocurrency tokens
If in a broad sense this element is the right to receive any service or goods, then in relation to digital money, it acts solely as a share. The cryptocurrency token is necessarily attached to the project that produces it. In this case, it has the following key features.
- It acts as a payment in a particular project, the system to which it is attached.
- It is based on the cryptocurrency. Token exists on the blockchain platform, which guarantees its security, and therefore its value.
- it can exist only within the framework of one system. Functions of the token, as a rule, are prescribed in the project’s smart contract and on its basis a spectrum of credible opportunities for the holder is created.
- Issue is a consequence of organizational actions of a physical or legal entity.
As you can see, from these features, the token has some similarities with the cryptocurrency, but in relation to it, it will always be derivative.
Differences and similarities of tokens and cryptocurrencies
If we are talking about the same features of these two units, then the following should be noted.
- Cryptocurrency is protected cryptographically (It explains the name). Tokens also have that.
- Transactions of tokens and cryptocurrencies are made with equal speed, almost instantly.
- In spite of the fact that tokens do not have their own blockchain, they are just like cryptocurrency, based on it.
The differences between these two elements are greater than similarities.
- Tokens are more centralized. Their independent issue is impossible; this is the prerogative of the organizer of an ICO project, an individual or a legal entity.
- The value of the tokens is ensured by the services they use for, and not by the code of the blockchain.
- The rate of cryptocurrency depends on the interest of investors and numerous other variables. The cost of the tokens depends entirely on their developers. An example is the unit Ripple. More than 90% of their total number is completely at the disposal of the creators of this system.
- The main function of the cryptocurrency is to transfer the value between the counterparties, while the tokens are designed to perform the option of digital shares.
Thus, it is obvious that based on the same technologies, the units under consideration have a fundamentally different purpose and production scheme.