Cryptocurrencies are virtual or digital currencies that are secured (encrypted) using cryptography. While Cryptography is the use of encryption techniques to verify and secure the transfer of transactions. It is concerned with various aspects of information security such as
Data confidentiality, data integrity, authentication and non-repudiation. In our present world, all coins and tokens are referred to as cryptocurrencies, but not all of them function as a medium of exchange. I would say referring to all coins and tokens as cryptocurrencies could be a bit of an overgeneralization. Bitcoin and other cryptocurrencies are cryptographic tokens, but not all cryptographic tokens are cryptocurrencies. Instead of using cryptocurrency as an umbrella word for both categories, the term crypto assets appears to be more appropriate. Crypto Assets include
Cryptographic Tokens, Auditable Digital Currencies, Cryptocurrencies and Non – Auditable Digital currencies (PayPal). In this article, I’ll be drawing a distinctive line between cryptocurrencies and cryptographic tokens, clearly showing their meeting points, and the notable differences between these categories of crypto assets.
The most common categorization of “cryptocurrencies” include
Coins: A coin is any cryptocurrency that has a separate or standalone Blockchain. It operates independently of any other platform. For a coin to be regarded as a cryptocurrency, the key mechanisms of such cryptocurrency must be decentralized. Some key mechanisms include its issuance process, transaction validation (anyone should be able to participate in its validation process), decentralized availability ( the system must be open to all without restrictions or permissions), and decentralized data sharing (Anyone should be able to see, store and verify data on the cryptocurrency network). If any coin falls short of these standards, it cannot be said to be a cryptocurrency in the true sense of it.
Altcoins are simply alternatives to bitcoin. Most Altcoins are variants of bitcoin, using Bitcoin’s open source protocol and changing to its underlying codes, creating a completely new coin with a different set of features. A concept for modifying open source codes when creating new coins is known as Hard forks. Examples of some Altcoins that fall into this category include Namecoin, litecoin, Auroracoin, Peercoin etc.
There are other Altcoins that are not derived from Bitcoin’s open source protocol. Instead, they have created their own blockchain which supports their native cryptocurrency. Examples of some of them are Ethereum, Omni, Ripple, Waves etc.
All Altcoins have one thing in common. They have their independent Blockchain, which verifies their transactions. Namecoin was the first Altcoin created in 2011. It is a decentralized open source information, registration and transfer system.
A token is any crypto asset that is built upon an already existing Blockchain. Cryptographic Tokens are not restricted to cryptocurrencies alone. They play different roles in different systems. Cryptographic Tokens could include one of the following.
· Currencies, used as payment systems between different participants.
· Digital Obligations
· Ownership Rights
Cryptographic Tokens are just a unit of account in a specific type of digital accounting system, usually a Blockchain based platform. They can represent any asset that is tradable from loyalty points to commodities, and even other cryptocurrencies. Creating tokens is a much easier process as you don’t have to create a new Blockchain from scratch. All you have to do is build on an already existing foundation or follow a standard template already existing such as the Ethereum or waves platform. The functionality of creating your own tokens is made possible by the use of smart contracts and self-executing programmable computer codes which do not need any third parties to operate.
Initial Coin Offerings (ICO)
Tokens are created and distributed to the public through Initial Coin Offerings (ICO’s), which is the crypto-tokens crowdfunding process through the release of a new cryptocurrency or crypto token, to fund project development. It is a rough equivalent of Initial Public Offerings (IPO) used for stocks in the investment world. IPO’s function as fundraisers to generate capital for a company hoping to launch a new app, product, coin or service. Interested investors can then buy their stakes either with pre-existing tokens or with fiat currency. In exchange for this, investors would receive a cryptocurrency token specific to the ICO, with the hopes that the token will perform well and provide huge returns on their investment. The company holding the ICO uses the funds to further its cause, or launch its product or service. ICO’s have proven to be more productive by the regulated capital raising systems available by banks and venture capitalists.
Cryptocurrency v Crypto Tokens; What’s The Difference?
A cryptocurrency is essentially a means of payment. It is made to perform the functions of money and act as a unit of account, a medium of exchange and a store of value. It possesses the characteristics of fungibility (one unit is equivalent to the other), divisibility (it can be broken down into smaller units of value), Uniformity (all versions of the denomination has the same value), Portability (it can be carried and exchanged), Durability (it can be used many times without degrading) and it is limited in supply. Most Coins tend to take the form of native Blockchain tokens like bitcoin (BTC), Litecoin (LTC), Monero (XMR) etc. ChronoBank’s Labour Hour (LH) tokens, which are hosted on Ethereum, can be considered as coins.
Their purpose is solely to act as a form of money, storing value over time and for payment for services.
The functions of Crypto tokens on the other hand are more diversified. Blockchain tokens do have value, but they cannot be considered as money like we would consider bitcoin and Altcoins. Tokens are hosted on another Blockchain, like Ethereum or Waves; protocols that allow users to create them using the core coin. Tokens built on the Ethereum platform are known as the ERC-20 tokens, while tokens built on the NEO platform are known as NEP-5 tokens.
Tokens offer more functionality compared to digital coins. They allow their holders to be able to engage in some kind of activity. For instance, If you wish to bet on the outcome of future events through decentralized prediction market Augur, you’ll need REP, the Augur platform’s native cryptocurrency token. Similarly, if you wish to use the Golem DApp, you would need GNT tokens. They may deliver value to investors, beyond speculative returns; this is one of the purposes of ChronoBank’s TIME token. That can occur in a variety of ways, including buybacks (since dividend payments entail regulatory problems). They may be used to hold votes by the community on key business decisions, or even technical changes to the platform.
In view of these, cryptocurrency and cryptographic tokens might on its face appear to be similar, but they both possess marked differences with which we can distinguish them from each other. It has been said that the major difference between both is the ability of a cryptocurrency to stand alone with a separate Blockchain. A cryptographic token will always require an already existing Blockchain before it can function.
Dr. Edson Pindza