Blockchain: Cryptocurrency vs. Token
There is a crucial distinction that needs to be made when talking about Blockchain technology, and it pertains to the difference between a cryptocurrency (also called a coin) and a token. Why is that? A few recent news headlines about cryptocurrencies should shed some light:
“Down More than 70% in 2018, Bitcoin Closes Its Worst Year on Record.”
“Calling Crypto a ‘Harsh Mistress,’ ShapeShift Announces Major Layoffs.”
“Crypto Market Risks Dip Below $100 Billion After Dropping $15 Billion in Bad Week.”
“Bain-Backed Crypto Startup Closes as Securities Laws Bite.”
“Fourth suspect arrested after major crypto theft in India.”
“Romanian Coinflux Crypto Exchange Founder to Be Sent to US for Crime, Fraud and Money Laundering.”
Blockchain’s got a bad reputation, because of the speculation that surrounds cryptocurrencies. Yes, the Bitcoin lost more than 70% of its value within a year. Unless you live in Venezuela and are exposed to seven-digit inflation rates (yes, seven digits), to experience such a level of monetary erosion is a phenomenon that’s about impossible to grasp. And yet it’s been a reality for many investors worldwide. But Blockchain technology is so much more than cryptocurrencies alone. This is why I want to make a clear distinction between cryptos and tokens.
The Basics About Cryptocurrency (or Digital Coin)
A crypto is an asset that is native to its own Blockchain. For example, Bitcoin operates and functions on the Bitcoin Blockchain and Ether on the Ethereum Blockchain. Digital coins are used the same way fiat currencies are: to pay for goods and services (priced in fiat currencies or coins) and for trading purpose exactly like the forex trading works (exchange Bitcoins for Ethers, Ethers for U.S. Dollar, etc.).
Having said that, there are cryptos that are used in another way than for payment and trading purpose. Thus, Ethers are also utilized as fuel to transact on the Ethereum Blockchain. In other words, each time a transaction occurs via a decentralized application that sits on top of the Ethereum Blockchain, Ethers are burnt or consumed as fuel. The application may have its own token or digital coin, however to run on Ethereum, it consumes Ethers.
There are about 2,100 coins in existence today. And market caps are quite disparate. On one end of the spectrum, you have Bitcoin (“An innovative payment network and a new kind of money”) with a current market cap of $70.5 billion and on the other end of the spectrum a coin named HarmonyCoin (“A cryptocurrency born to bring convenient international remittance and innovation in the next-generation financial settlement”) with a current market cap… of $68.
The Basics About Token
A token is not a cryptocurrency. A token is created on an existing Blockchain. In other words, anyone can create their own custom token on an existing Blockchain platform. For example, if a token is created on the Ethereum Blockchain, the developer needs to spend some Ether to get the network’s miners to validate the token creation, which is assimilated to a transaction. Moreover, there is a fee associated to all transactions that occur on the Blockchain. The fee is in Ether when the decentralized application (DApp) is built on Ethereum.
When creating their tokens, developers choose the volume they want to issue and to what operations those tokens will be affected, once issued. Tokens are most oftentimes used to activate features associated to the DApp for which they were created. Said differently, tokens are used to interact with DApps built on top of different Blockchain networks. Tokens can also be utilized to consume the services a DApp offers. A DApp that consumes its own token would not accept Bitcoins, for example, to use its features. However, if the DApp is built on Ethereum, each transaction will require some Ether, because miners need to be paid to validate the transaction.
And the latter represents an obvious advantage. Thus, if a developer were to create his or her own Blockchain network and coin instead of creating a DApp and its token, then they’d have to find miners to verify all transactions occurring on the Blockchain. And it takes a significant volume of miners to create a strong Blockchain network that’s virtually immune to hacking. Therefore, leveraging a shared Blockchain on which several decentralized applications run makes much more sense.
To Conclude: It Really Ain’t Venezuela…
To summarize: Cryptos or coins are native to their own Blockchain. Tokens are built on top of another Blockchain.
Now, Blockchain technology is revolutionizing the way several industries have been operating and transacting: Healthcare, Oil and Gas, Transportation, among so many others. Developers have been creating DApps that are currently facilitating this revolution by automating and securing processes. Tokens are an intrinsic part of those decentralized applications, and they are not exposed to speculative behaviors like cryptos are. This is what I suggest you remember the next time you hear some Blockchain technology bashing.