Cryptocurrencies vs. crypto tokens
There are two main types of blockchain-based digital assets: cryptocurrencies and crypto tokens. Though the terms are often used interchangeably, there’s an important difference between them:
- Cryptocurrencies are the native digital asset of blockchain networks, and a core part of how they function.
- Crypto tokens are secondary assets built on top of existing blockchain networks, but not a core part of how they function.
Cryptocurrencies belong to their own native network, while crypto tokens do not. Each blockchain has only one cryptocurrency, but may have hundreds or thousands of crypto tokens.
The more general term “crypto” is often used to collectively refer to the entire asset class.
What’s a cryptocurrency?
Cryptocurrency is described as the “native” digital asset of a blockchain network because it powers the network itself. Each blockchain’s network activity is denominated in one—and only one—native cryptocurrency. For example, the Bitcoin network’s native cryptocurrency is bitcoin (BTC), Ethereum’s is ether (ETH), and Solana’s is solana (SOL).
Conceptually, this is similar to how different countries have national reserve currencies. In the US, for example, value is denominated in the US dollar (and dollars are the main medium of exchange).
Why do blockchains need cryptocurrencies?
Blockchains rely on cryptocurrency to incentivize individuals, groups, and sometimes even organizations to run the network. To understand why financial incentive is necessary, it’s helpful to know—very generally—how blockchains work.
A blockchain is a type of distributed database, meaning it’s hosted (or “lives”) on computers all over the world. These computers—which can even be in someone’s home—are referred to as “nodes” of the blockchain. This distribution of data (core to the new version of the Internet called “Web3”) means the cost of operating nodes is distributed as well.
By contrast, in the current version of the Internet—Web 2.0—databases, websites, and applications often live on centralized servers. The company that runs the database, site, or service also pays for the servers.
Running nodes costs money, both in the form of hardware and electricity. So blockchain networks need a financial reward system to incentivize people to operate nodes. To compensate node operators for their costs, and the work of processing, validating, and adding new transactions, each blockchain will have a corresponding cryptocurrency. This cryptocurrency (e.g. SOL or BTC) is native to one—and only one—blockchain.
Note: there’s a less common and somewhat confusing exception to the one cryptocurrency / one chain rule (namely, some “Layer 2” blockchains choose to use the cryptocurrency of their base network, rather than creating their own token), but this is an advanced topic better discussed elsewhere.
How do cryptocurrencies work?
Cryptocurrencies play two major roles in blockchain networks. They’re used to:
- Denominate platform-specific fees
- Pay out rewards as part of the consensus mechanism
Why do blockchains have fees?
Most well known blockchains charge a fee (known as a transaction fee or “gas” fee) to interact with the network. These fees prevent spam, and provide a way to compensate those who keep the network up and running.
If you send a transaction on the Ethereum network, for example, you’ll pay a fee in ETH. Those fees are then distributed to node operators as part of a blockchain’s consensus mechanism.
What’s a consensus mechanism?
Consensus mechanisms are agreed upon sets of rules that determine how blockchains operate—including fee structures, how transactions are processed and agreed upon, and how network operators are compensated. Each blockchain can create and use its own unique consensus mechanism, but most are carefully designed to:
- Make it financially beneficial for node operators to behave honestly and keep the network secure
- Make it economically unfeasible for bad actors to compromise the network
As part of the consensus mechanism, transaction fees are paid out to node operators who process, validate, and add new transactions to the blockchain. Node operators earn their rewards in the blockchain’s native currency (e.g. Ethereum node operators earn ETH). But regardless of which consensus mechanism a blockchain uses, it’s crucial that transaction fees and rewards are denominated in the network’s chosen currency.
What’s a crypto token?
Crypto tokens are units of value built on top of an existing blockchain network—they’re not related to its consensus mechanism or network security. Think of them as subsidiary assets that rely on a host blockchain to function.
Tokenization standards: how crypto tokens are built
Crypto tokens are often built according to specific rules, called “tokenization standards,” that serve as a blueprint for the design, behavior, and operation of tokens on a specific network. These standards make it easier for crypto tokens to be stored, used, and exchanged on a blockchain in the same way as the chain’s native cryptocurrency.
The most common type of crypto tokens are ERC-20 tokens on the Ethereum blockchain, but other platforms have their own tokenization standards (like BEP-20 on Binance Smart Chain, and SPL on Solana). The ERC-20 standard, for example, makes it possible for tokens to be easily integrated in an Ethereum wallet and used across Ethereum-based DApps.
How do crypto tokens work?
Where cryptocurrency is supplied and issued based on the network’s consensus mechanism, crypto tokens are created with smart contracts—specialized, self-executing programs that run on blockchains. Smart contracts specify things like a token’s total supply, issuance, and its features and functions.
Crypto tokens aren’t meant to be standalone currencies, but rather to represent a certain value, utility, or function within a specific blockchain network or platform. For instance, the Basic Attention Token (BAT) is an ERC-20 token built on Ethereum, but used for specific utility related to Brave and Brave Rewards.
Crypto token use cases
Crypto tokens can be used to represent a wide variety of things, including:
- Utility on specific platforms (like access to certain features or services)
- Commodities (like real estate or gold)
- Financial instruments (like derivatives contracts)
- Fiat currencies (as stablecoins)
- Digital assets (as non-fungible tokens, or NFTs)
- Ownership in a company
- Voting rights in platforms with decentralized governance
Why do Web3 projects usually issue tokens instead of cryptocurrencies?
Building a blockchain is a complex, expensive, and lengthy task; new Web3 projects can avoid all this by using existing blockchains, which is easy and cheap by comparison. It’s sort of like how a startup can get a business off the ground more cheaply by using an infrastructure service (like AWS) instead of maintaining their own servers.
Tokens help Web3 developers get people engaged with their projects, and / or create utility on their DApps. They have a wider range of applications than cryptocurrencies. Projects can also benefit from an existing blockchain’s security and stability, and their network effect: the built-in potential that comes from building on a reputable chain that thousands of people already use.
Understandably, many developers want to focus on building their Web3 games, DeFi protocols, or other DApps without worrying about building the blockchain they’ll live on. For all these reasons, developers will often issue tokens rather than full cryptocurrencies.
Differences between cryptocurrencies and tokens
The differences between cryptocurrencies and crypto tokens are fundamental.
The purpose of cryptocurrencies
Cryptocurrencies all share one purpose: to facilitate network activity and security on blockchains. This keeps the chain economically viable, and incentivizes nodes to uphold the network. Tokens are not involved in these processes.
The purpose of crypto tokens
Unlike cryptocurrencies, tokens are often used for more than just holding and exchanging value. With a wide range of use cases, they can represent decentralized voting rights, digital collectibles in the form of NFTs, or even blockchain-based versions of real-world assets like the US dollar. Crypto tokens also far outnumber cryptocurrencies because of their flexible use cases, and relative ease of development.
Similarities between cryptocurrencies and crypto tokens
Despite their key differences, cryptocurrencies and crypto tokens do share some similarities. In each case, they:
- Are built entirely on blockchains
- Use cryptography and blockchain technology for security and transparency
- Can be used as a medium of exchange
- Hold value that can fluctuate with supply and demand
- Can be transferred between users
- Can be made available to trade on crypto exchanges
- Are decentralized (and thus more resistant to the control of a single person or institution)
And lastly, both cryptocurrencies and crypto tokens (even those belonging to different blockchain networks) can often be stored in the same crypto wallet. Check out Brave Wallet if you’re looking for secure storage for all your crypto assets (including cryptocurrencies, tokens, and NFTs) built right into your browser.
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