Digital Assets - Crypto Currencies and Tokens

Understand Digital assets & the difference between cryptocurrencies and tokens.

Introduction

I've seen most of the time people often confuse Cryptocurrencies with Crypto Tokens or vice-versa. It happens because both are generally used interchangeably. But they have some key differences.

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Cryptocurrencies are native to their blockchains, ie. ETH to Ethereum and BTC to Bitcoin. While crypto tokens are built upon existing blockchains.

What are Digital Assets?

In a broader spectrum, a digital asset is a non-tangible asset (no physical existence). It is created, traded, and stored in a digital format. When we talk about Blockchain, digital assets include cryptocurrencies and crypto tokens.

Cryptocurrency and tokens are unique subclasses of digital assets that use cryptography. An advanced encryption technique, which assures the authenticity of crypto assets by eradicating the possibility of counterfeiting or double-spending.

As I've stated, cryptocurrencies are the native asset of a blockchain. Whereas, crypto tokens are part of a platform or DAO. That platform is built upon existing blockchains, like many ERC-20 standard tokens.

What is Cryptocurrency?

It's a native asset of a blockchain network, which is used for trading, serves as a medium of exchange & holds some value. The Blockchain protocols on which they run, issues them. Hence called the native currency.

Characteristics of cryptocurrencies:

  • Decentralized, not dependent on a central issuing authority. Instead, they depend on code to manage issuances and transactions.
  • Built on the Blockchain.
  • Uses cryptography to secure its underlying structure and network system.

What are Tokens?

Can also be called crypto tokens.

These are the units of value that some organizations built or working upon blockchain-based organizations releases. They are built on top of existing blockchains. While they can work or look similar to cryptocurrencies, they are a whole different class of digital assets.

Coming on in-real-life examples

Revising fundamentals:

  • Cryptocurrencies are native assets of a blockchain protocol.
    • Eg. Ethereum Blockchain's native token is ether (ETH).
  • Organizations create tokens. They use existing blockchains to build their tokens.
    • Eg. Tokens built upon Ethereum are DAI, LINK or WETH (ether's own wrapped version for trading ETH with ERC20 compatible tokens).

Conclusion

Cryptocurrencies are native currencies issued by Blockchain protocols. Tokens are digital assets built upon pre-existing blockchains.

Mind Map of Digital Tokens

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