Digital money and assets are becoming more and more familiar, but not all users have figured out the terminology yet. Quite often, you can come across two terms: Cryptocurrencies vs Tokens. Even though they mean something similar on the one hand, in reality, the concepts have significant differences.
What Is a Cryptocurrency?
Cryptocurrency is a means of payment, the primary ability to be used as a unit of account. Mostly, it is decentralized, which means that no one directly manages it except for the asset holders themselves. Banks, monetary authorities, and other branches of government and business do not affect crypto money.
There is a broad concept of digital currency — these are any monetary units that exist in electronic form. Additionally, digital currencies are divided into regulated and unregulated or virtual currencies. Regulated ones are, exemplarily, the digital yuan, which is currently being tested in China. But there is no government or central bank behind virtual currency: cryptocurrencies, loyalty points, game currencies, etc., fall into the category.
Finally, a cryptocurrency is a virtual currency that uses cryptography to secure transactions and control issuance. You compare the structure to a nesting doll: cryptocurrencies are hidden inside virtual currencies.
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Types of Cryptocurrencies
For the most part, the following types of cryptocurrencies are defined:
- Bitcoin. Often, Bitcoin is not allocated to a separate group, although it is worth doing because it cannot be included in any other types. From BTC, the whole history of cryptocurrencies began, and its structure is still copied, although some additions and changes have been made. But it is precise because of the status of BTC that it is elevated to a separate group.
- Altcoin. All cryptocurrencies use this name except BTC. After the birth of Bitcoin and the growth of its popularity, other developers began to take its code as the basis of their coins. One of their main goals is to solve the problems and shortcomings of the progenitor. The group includes Ethereum, LTC, USDT, DOGE, and others.
- Stablecoin. One of the offshoots of altcoins. This group includes cryptocurrencies, the value of which is tied to certain physical assets or backed by a reserve. Most often used to prevent the need to transfer digital currency to fiat and vice versa constantly. The group includes USDT, BUSD, etc.
- Token. A coin tied to a specific project, without which it cannot exist.
A token is a type of cryptocurrency. Scale is one of the main differences between these two concepts, so they mean the same thing, but not in all cases.
Coin vs. Token
Cryptocurrencies vs Tokens can be divided into two broad groups: those with their blockchain and those using a blockchain created by someone else. Cryptocurrencies with their own blockchain are Bitcoin, Ethereum, Litecoin, XRP, EOS, Tezos, Cardano, etc. Units of such cryptocurrencies are correctly called coins.
But multiple popular cryptocurrencies do not have their blockchain and boast a market capitalization of over $1 billion: primarily USDT ($30 billion), LINK, USDC, UNI, WBTC, AAVE, etc. It would be more accurate to name them tokens.
Some believe coins serve only as a unit of monetary settlements, and in addition, tokens provide access to the functionality of decentralized applications. However, this statement is questionable because the native coin of some blockchain (say, DOT or EOS) can also be used in applications.
Differences and Similarities
The main difference between Cryptocurrencies vs Tokens is that the former is tied to a specific project. A token is a means of payment in a particular blockchain based on the underlying cryptocurrency. A token cannot exist without a cryptocurrency, but a cryptocurrency without a token can.
Among primary differences:
- Like a cryptocurrency, the token does not have its blockchain — the token is based on an already created platform.
- The emission process takes place in different ways. The creator of tokens immediately releases the entire volume to the market, and the emission of cryptocurrency occurs in mining.
- The token has a broader range of applications, unlike cryptocurrency.
A cryptocurrency is much larger than a token: the token is used in the internal market of the project, and the cryptocurrency circulates in the external digital economy.
Among the most striking similarities:
- They are present only in the virtual world. There is no physical analog.
- They are used as a means of payment.
The cryptocurrency world is complicated, and sometimes it is difficult to understand even elementary concepts. However, it is easier not to get lost when you dive into such fundamental concepts as Cryptocurrencies vs Tokens and know their similarities and differences.
Cryptocurrencies vs Tokens is a complex topic. The primary function of cryptocurrency is purchasing, a token can have many parts, and all of them will depend on the project based on which they were created. Sometimes a token can become a cryptocurrency, but for this, the project must become very popular for the intrinsic value of its internal currency to increase so much. For example, Ethereum appeared as a token in 2014, but it was created based on its blockchain. The novelty of this project was the emergence of smart contracts, which are extremely popular today. It allowed ETH to grow into a valuable cryptocurrency in itself.