Often considered as equivalent, cryptocurrency and token are however two distinct entities, which diverge in many points.
In the world of crypto-currencies, the diversity of technical terms used – usually from English – can clearly confuse neophytes who wish to learn more. A veritable jargon of experts used by enthusiasts on specialized blogs and forums, which can seem opaque to say the least. Among the most commonly used terms, “cryptocurrency” and “token” are sometimes equated, even though they refer to two different entities.
Here’s a comprehensive summary of the information you need to properly distinguish between a crypto-currency and a token.
Definition of a crypto-currency
A cryptocurrency is a virtual currency based on the blockchain system. It gets its name from the fact that its overall functioning, as well as its security, are both based on cryptography. As a currency, cryptocurrency serves as both:
a store of value;
a unit of account;
as an intermediary in transactions.
The most common and widely used cryptocurrencies today, namely Bitcoin, Ethereum and Ripple, are all independent and operate on their own blockchain. Most of them are forks (derivatives) of Bitcoin and therefore function in the same way. However, some of them have technical specificities; Ethereum in particular allows to store data and to use smart contracts. Although they are decentralized and are exchanged directly from peer to peer, cryptocurrencies are used in the same way as fiat currencies. Thus, they can be moved, destroyed, or divided. In addition, they are limited in quantity; for example, there are only 21 million units of Bitcoin in circulation at any given time. Furthermore, cryptocurrencies have no intrinsic value. Their value actually comes from the consensus of the users of the different blockchains around the validation of the transactions that are made on them, via the mining process.
Good to know: cryptocurrencies without blockchains can also exist. Digicash, for example, which was one of the very first forms of electronic payment by cryptography in the early 1990s, did not have a blockchain.
What is the difference between cryptocurrency and coin?
Often the source of much confusion and other language abuse, the term “coin” refers to the unit of account of a cryptocurrency. A coin is therefore a unit of value of a virtual currency. On the other hand, some crypto-currencies are called “Altcoins”. These are simply cryptocurrencies whose technology is a derivative of the original source code of Bitcoin, the first virtual currency to be created in 2008.
Altcoins are therefore based on a blockchain with the same technological and functional characteristics as Bitcoin, but may have new features; Litecoin is an example of an Altcoin.
What is a token?
Also known as a “token”, a token is a digital asset linked to a cryptocurrency. In fact, it can represent a cryptocurrency, but also any form of value derived from the underlying blockchain. ERC-20s, for example, are tokens created on the Ethereum blockchain.
There are therefore different types of tokens:
utility tokens, allowing their owner to access a product or service;
security tokens, allowing their owner to invest in a blockchain project
equity tokens, comparable to corporate financial securities…
Unlike coins, tokens require another platform to be used. Furthermore, tokens are often mistakenly equated with cryptocurrencies; the vast majority of tokens are not created with the purpose of serving as currency. In addition, tokens are also distinguished from cryptocurrencies by the fact that they do not have their own blockchain. Finally, the creation of a token clearly diverges from the creation of a cryptocurrency, the former being much easier than the latter. Indeed, where creating a crypto-currency requires a huge coding work in order to develop the associated blockchain, creating a token requires the simple use of a template; much simpler and faster operation.
Regularly assimilated or confused, crypto-currency and token are clearly distinguished. The former is a virtual currency based on the decentralized and cryptographically secured system of the blockchain. As a currency, it is a unit of account and a store of value, which can be exchanged in transactions. The second is a digital asset linked to a cryptocurrency, with multiple uses, of which that of currency is only rarely encountered.