In a past blog post, “Blockchain Vs Cryptocurrency”, we explained the difference between this pair of terms frequently used interchangeably incorrectly. We discussed how cryptocurrency is just one application of blockchain technology and how that technology can be used to make a bunch of applications other than cryptocurrencies.
In this post we aim to similarly highlight the differences between two more related concepts that are also incorrectly used interchangeably. While the terms Cryptocurrency and Token are related, they are not synonymous, and should not be used as having the same meaning. This a common misunderstanding for both neophytes as well as industry and market veterans, who lack a technical background. Another contributing source of the confusion is that both a Cryptocurrency and Token use cryptography, the mathematical functions to store and transmit data where only the intended recipient can read it. We hope this will bring clarity to the confusion.
To start, let’s define cryptocurrency. According to Merriam Webster’s Dictionary a cryptocurrency is,
“any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions”.
Examples of cryptocurrencies include Bitcoin (BTC), Dogecoin (DOGE), Litecoin (LTC), Monero (XMR), Zcash (ZEC), Nexus (NXS) along with countless others that have and will be created. Cryptocurrencies depend on distributed ledger technologies (ie. blockchain) to maintain decentralized control, record the transactions in the system, and prevent unique problems of cryptocurrency like double-spend.
Now that we understand cryptocurrency (better), what are tokens? Historically, tokens have been pieces of metal or plastic issued by a particular group on specified terms to be used within a system instead of money. Like the tokens from video game arcades, they are a simple representation of something else. Token examples include: a means of admission to a system (subway token), a reward for using a system (airline miles), an access lock (public restroom token), or segmented ownership (stock certificate for a company).
With the recent rise of blockchain technology and cryptocurrency to mainstream awareness, and release of the Ethereum ERC-20 token creation standard, tokenization is growing exponentially. The ability for anyone who understands smart-contracts to be able to issue tokens on Ethereum has resulted in a large number of tokens representing all types of things including: attention (Brave’s BAT), entertainment assets (SingularDTV’s SNGLS), logistics services (ShipChain’s SHIP), forecasting services (Auger REP), point-of-sales solutions (PundiX PXS), rent-by-the-minute supercomputer (Golem’s GNT), and more. The only limit to the growth of tokens is people’s imagination.
So what are the differences between a cryptocurrency and a token?
For starters, let’s focus on issuance and regulation. While a cryptocurrency has a creator, it is neither issued nor regulated by a centralized authority, but instead through a decentralized system of strong cryptography. A token, however, is created, issued, and regulated by a centralized authority, like the project or person who has created the underlying smart contract.
The next differentiator is the application of each. A cryptocurrency acts as a fungible medium of value exchange between addresses of its native blockchain, whereas, a token can be fungible and/or non fungible and requires a functional utility outside of being a medium of value exchange.
Finally, let’s look at both in regard to how they relate to the blockchain. Cryptocurrencies require distributed ledger technology (ie.blockchain) to exist, but blockchains do not require the existence of a native cryptocurrency. Tokens do not require distributed ledger technology to exist, but can utilize blockchain technology to decentralize ownership and power DApps. Check out our blog post “How the blockchain and tokens power DApps” to learn more.
While Everest does not utilize a native cryptocurrency, we do currently utilize two tokens to interact with our dual-blockchains. The “ID” token is a utility access token that grants variable permissions to different resources on the Everest platform. The “CRDT” (pronounced credit) is a fungible stable token, pegged to the US Dollar, used as a voucher within the system.
In conclusion, a Token and a Cryptocurrency are not the same concept. A Cryptocurrency is a free-floating commodity designed for speculative investment as a currency or store of value. A Token is a representation of a good, service, or utility.