You mustn’t mix the terms tokens and cryptocurrencies for obvious reasons. There are certainly visible and essential differences between them that make each of them unique in their way.
Tokens and cryptocurrencies are the two extremely used digital assets existing within blockchain technology. But, wait. There is a big difference between them. It is that they don’t lie within the same blockchain. Check an interesting article on how banks tried to kill crypto .
Cryptos have their separate blockchains. In contrast, cryptocurrency tokens are created on a blockchain that already exists. Now, let’s dive deeper into the meaning of these terms.
Suppose that you have just stepped into the cryptocurrency and blockchain fandom. You should know what makes these tokens, cryptos, and digital assets different so you can establish where you want to invest and what you want to buy or sell. These terms can be used interchangeably sometimes but there are still some factors that distinguish one from the other.
The digital asset is not a tangible asset and is built, stored, and traded in a format that exists digitally. If we talk about blockchain, then digital assets involve crypto tokens and cryptocurrencies.
Some subclasses lie in the digital assets and there is an essential difference between them. Cryptos are like the native assets in the blockchain, for example, Ethereum or Bitcoin that you can trade through bitcoin trading software.
On the other hand, tokens are established in a place that is exclusively created on a blockchain that already exists. For example, there are several ERC-20 tokens from which the entire Ethereum ecosystem is built.
Similar to digital assets, cryptocurrencies are the native assets that exist on the blockchain network. Cryptocurrencies can be used as an exchange medium, stored for value, and traded to other users or investors as well. The protocol of blockchain issues the cryptocurrency directly and runs on it. This is why cryptos are known as the native currency of blockchain in the industry. If we look at other several cases, cryptos are also used to process transaction fees and incentivize users.
This helps in keeping the network of the cryptocurrency safe and secure. Moreover, cryptos are decentralized and highly volatile. They don’t rely on an external authority to be issued. They, however, rely on a particular code that manages all the cryptos transactions and issuance matters.
Cryptos are built on DLT (short for distributed ledger technology) or a blockchain that lets users implement the rules as proposed by the system. Cryptocurrencies also make use of cryptography to make the networking system and structure of the cryptocurrency highly secure.
Tokens, also called crypto tokens, are developed by projects or organizations that are based on blockchain technology. They are basic units of value existing on the networks of blockchain. They have high compatibility with other cryptos of the same network and belong to a completely different class of digital assets. Tokens are formed by such platforms that establish above these blockchains.
Take the blockchain of Ethereum for example. Ether (ETH) is its native token. Similarly, other tokens make use of the blockchain of Ethereum. Crypto tokens are also created through Ethereum and include COMP, DAI, CryptoKitties, LINK, etc. Crypto tokens also serve different functions on whatever platform they are created on.
This also includes their participation in DeFi (Decentralised finance) mechanisms giving them access to services that are particular to a platform and also letting them play games.
Moreover, cryptocurrency tokens are transparent, programmable, and trustless. Meaning that a crypto token runs on certain software protocols comprising smart contracts. They highlight the various functions and features of these tokens as well as the rules and regulations of engagement for their network. They are trustless in the sense that a central authority does not control the system.
Instead, they run on already established protocol rules on the network. Also, being transparent means that all the transactions that occur in the system can be verified and viewed by everyone. The purpose of a crypto token is that you can buy or trade it just like you trade or buy other securities and make a good profit. They serve their purpose in the economy and are also a representation of the investor stake within a company.