Digital Assets: Tokens vs. Cryptocurrencies

date_range June 14, 2022
person Magic Square

In our increasingly digital world, where the traditional financial system is slowly but surely shifting online, it’s important to know your digital assets. We’ve all seen it on the front pages, headlines fueling talk about cryptocurrencies, coins, tokens, NFTs, you name it. A large number of freshly-coined terms are being tossed around.

It’s no wonder that these new types of assets give people headaches. Everything new must be explored and given its most proper use cases. This is why it’s important to differentiate these terms from one another.

The fundamental differences between cryptocurrencies and tokens must be understood in order to reach any sort of mastery of the subject. This article gives you everything you need to know to distinguish between tokens and cryptocurrencies. Let’s dive in.

What Are Digital Assets?

Before we get into crypto and tokens, we must understand the ins and outs of digital assets. This is where it all began, so the foundation should be laid properly. 

A digital asset is classified as non-tangible – meaning that it is created, stored, and traded in its digital form. When we look at it from the blockchain context, digital assets include crypto tokens and cryptocurrency.

These can be categorized as unique subcategories of digital assets that also utilize cryptography. This advanced encryption technology is in place to assure users of the authenticity of these assets by removing the possibility of double-spending and counterfeiting.

But what’s the key difference? Well, cryptocurrency is considered a native asset of a certain blockchain, like Bitcoin and Ethereum. On the other hand, tokens are a part of a platform built on the existing blockchain. A perfect example is the ERC-20 tokens that form the Ethereum ecosystem.

Defining Tokens

‘Crypto tokens’ or just ‘tokens’ are units that hold value. They’re developed by blockchain-based organizations or projects using an existing blockchain infrastructure. In fact, they look like cryptocurrencies but actually belong to a whole different class of digital assets.

Here’s a perfect example: the Ethereum blockchain has a native token, ETH or ‘Ether’. While Ether is the native cryptocurrency of Ethereum, numerous other tokens also use the Ethereum blockchain. Here are a few examples of those other tokens: LINK, DAI, COMP, and CryptoKitties. These tokens indeed have superpowers; they can be used to enjoy the many benefits of decentralized finance (DeFi), GameFi, and a whole host of platform-specific services.

But before getting into the token-making processes, let’s get our token standards straight. The majority of tokens are built on top of Ethereum, and the most-used standards are ERC-20 and ERC-721, the second typically being used for non-fungible tokens (NFTs).

Crypto tokens are:

  • Permissionless – anyone can enter the system without any specific credentials.
  • Programmable – running on software protocols composed of smart contracts.
  • Transparent – protocols and transactions are verifiable and viewable by all participants.
  • Trustless – missing a central authority that could control the system. Instead, the network runs on predefined rules set by network protocols.

Like cryptocurrency, crypto tokens can hold digital value. They can be exchanged but also designed to portray physical assets, certain utilities, services, or more traditional digital assets. NFTs  (as mentioned above) fall into this category because they are digitally tangible; they can be tied to anything, from art and real estate, to music and video game collectibles. They can also be intangible assets such as data storage space and processing power.

Defining Cryptocurrencies

The definition is simple; a certain cryptocurrency is the native asset of a certain blockchain network. Its main characteristics include trading, exchanging, and storing value. This digital currency is issued by the host blockchain – this is why many refer to it as a ‘protocol’ – as the blockchain’s native currency, it dictates the parameters of the blockchain environment.

Cryptocurrencies can typically be a medium of exchange when an asset is used to obtain services and goods. The other use case is a store of value, which implies that this asset can be held or exchanged for fiat currency – money you can touch. This exchange can be done without any significant purchasing power losses.

Main characteristics:

  1. Cryptocurrency is decentralized. There’s no central ruling authority. Code is used to manage transactions and issuance.
  2. Cryptocurrency is built on a certain blockchain or other Distributed Ledger Technology (DLT). The rules are automated and trustless, enforced by the participants themselves.
  3. Cryptocurrency relies on cryptography to secure its structure and network.

Final Thoughts

Finally, the blockchain industry will continue to grow and mature. Simultaneously, the number of digital assets will also increase, along with the various needs of ecosystem participants. The appeal is apparent as our world moves increasingly into the digital realm.  

The conclusion is solid: digital assets are expected to grow exponentially, expecting to support multiple industries. The way they interact, operate, and produce value will forever be changed with the mass use of the blockchain, cryptocurrencies, and crypto tokens. New economic and social possibilities are on their way!