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Cryptocurrencies vs Tokens in Digital Assets

What is the definition of a digital asset?

If you're new to blockchain and cryptocurrency, knowing the distinction between digital assets, cryptocurrencies, and tokens is critical. While these phrases are sometimes used interchangeably, they vary in several important ways. A non-tangible item that is generated, traded, and kept in a digital format is referred to as a digital asset. Cryptocurrency and crypto tokens are examples of digital assets in the context of blockchain.

Cryptocurrency and tokens are special kind of digital assets that use cryptography, an advanced encryption method that ensures the legitimacy of crypto assets by preventing counterfeiting and double-spending. The key distinction between the two types of digital assets is that cryptocurrencies are created as part of a platform that is built on an existing blockchain, such as the many ERC-20 tokens that make up the Ethereum ecosystem, whereas tokens are created as part of a platform that is built on an existing blockchain, such as the many ERC-20 tokens that make up the Ethereum ecosystem.

What Is a Cryptocurrency and How Does It Work?

A cryptocurrency is a blockchain network's native asset that may be exchanged, used as a means of exchange, and stored of value. A cryptocurrency is sometimes referred to as a blockchain's native currency since it is issued directly by the blockchain system in which it operates. Cryptocurrencies are frequently used not simply to pay network transaction fees, but also to motivate users to maintain the cryptocurrency's network safe. Typically, cryptocurrencies are used as a means of trade or a store of wealth. A medium of exchange is a financial asset that may be used to purchase goods or services. A store of value is an asset that may be retained or exchanged for fiat currency at a later date without severe buying power losses.

The following are some of the most common properties of cryptocurrencies:

  • Decentralized, or at least not reliant on a central issuing authority. Instead, cryptocurrencies rely on code to manage issuance and transactions.
  • Built on a blockchain or other Distributed Ledger Technology (DLT), which allows participants to enforce the rules of the system in an automated, trustless fashion. 
  • Uses cryptography to secure the cryptocurrency’s underlying structure and network system.

What Is a Token, Exactly?

Tokens, often known as crypto tokens, are digital units of value created by blockchain-based organizations or initiatives on top of existing blockchain networks. While they frequently have extensive compatibility with the network's cryptocurrencies, they are a whole new digital asset class.

Tokens are developed by platforms that build on top of blockchains, whereas cryptocurrency is the native asset of a certain blockchain technology. The native token of the Ethereum blockchain, for example, is ether (ETH). While ether is the Ethereum network's native cryptocurrency, the Ethereum blockchain is also home to a variety of other tokens. DAI, LINK, COMP, and Crypto kitties are just a few of the Ethereum-based crypto coins. On the platforms for which they are designed, they may use these currencies for a variety of things, including engaging in decentralized finance (DeFi) systems, accessing platform-specific services, and even playing games.

For developing crypto tokens, there are various commonly used token standards, the bulk of which are built on top of Ethereum. ERC-20, which enables the development of tokens that can interact with Ethereum's ecosystem of decentralized apps, and ERC-721, which was developed to enable non-fungible tokens that are uniquely unique and cannot be interchanged with other similar tokens, are the most extensively used token standards. Hundreds of distinct ERC-20 tokens and thousands of ERC-721 tokens are in circulation as of 2020. The number of distinct tokens is anticipated to continue to rise at a surprising rate as new tokens are produced to fit blockchain's increasing use cases. Crypto tokens are often programmable, permissionless, untrustworthy, and transparent.

They are programmable because they run on software protocols, which comprise smart contracts that define the token's characteristics and functionalities and the network's rules of engagement. The term "permissionless" refers to the fact that anybody can use the system without requiring specific credentials. The term "trustless" refers to the fact that the system is not controlled by a single central authority and instead operates according to the rules set out by the network protocol. Finally, transparency requires that all parties may see and verify the protocol's rules and transactions.

Crypto tokens, like bitcoin, may store value and be traded, but they can also be designed to represent actual assets, more typical digital assets, or a specific utility or service. There are crypto currencies that represent physical assets like real estate and art, as well as intangible assets like processing power and data storage space. Tokens are also widely used as a governance tool for voting on certain parameters, such as protocol updates and other decisions that determine the future course of different blockchain initiatives.

Tokenization is the process of producing crypto tokens to serve these many tasks. As the blockchain industry matures, the number of distinct digital assets will only increase in order to meet the diverse demands of all ecosystem members, from business partners to individual consumers. Because developing new assets in the digital world is less limiting than in the physical world, they predict these digital assets to change the way various sectors work, interact, and produce value, opening up a plethora of new social and economic possibilities.

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article by Amit Caesar:

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