While these terms might seemingly be used interchangeably, there are indeed fundamental differences between them. Whether you're brand new to the industry, looking for a new opportunity, or have been in the market for a while, distinguishing between the three will be a valuable endeavor. When it comes to the realm of blockchain assets and the information surrounding it, we are knowledgeable. Let's delve into it.
What are digital assets?
Digital assets are non-tangible assets that are created, traded and stored in a digital format. This includes everything from a website to a spreadsheet to a logo, anything uniquely identifiable that holds value. In the context of digital assets vs cryptocurrencies vs tokens, both cryptocurrencies and tokens are digital assets as they're created, stored and traded using blockchain technology.
Through blockchain technology, cryptocurrencies and tokens utilize an advanced encryption technique known as cryptography. This maintains their security and ensures that the digital assets cannot be counterfeited or double-spent. Each individual asset represents something, whether it be content, value or a tangible item.
What Are Cryptocurrencies?
While cryptocurrencies fall under the umbrella of digital assets, they too hold a unique characteristic. In order for a digital asset to be classified as a cryptocurrency, it must be created on its own unique blockchain (often referred to as a blockchain's native token).
Cryptocurrencies can be traded as a medium of exchange or store of value, depending on the platform for which it is built. On top of that, cryptocurrencies can also be used to pay transaction fees for using the network, or as an incentive to ensure the network is well-maintained.
Commonly, cryptocurrencies possess a decentralized nature, which implies that they operate without dependence on a central authority for network upkeep. Their functioning is governed by code that enables transactions and creation, rather than a centralized entity. Employing either blockchain or distributed ledger technology, cryptocurrencies leverage cryptography to ensure secure network operation, minimizing the need for trust and reducing the risk of fraudulent activities.
An illustration of a cryptocurrency is Bitcoin, which is constructed on its own blockchain and serves as a type of digital currency.
What Are Tokens?
Tokens differ from cryptocurrencies in that they are created on top of existing blockchain networks and not their own. A prime example is any ERC-20 token built on top of the Ethereum network, while these are still digital assets, they are classified as tokens due to their use of an existing blockchain. DAI, COMP and USDT are all examples of tokens that utilize the Ethereum blockchain.
While some are also mediums of exchange or stores of value, tokens provide more varied use cases. For example, some tokens are used to play games while others might be used for services specific to that platform, or across the greater decentralized finance (DeFi) landscape.
There are a number of token standards available which each serve different use cases, the majority of which are built on Ethereum. The most common, the ERC-20 token standard, allows for the creation of a token that can then be used across a range of compatible dapps (decentralized apps). Another common token standard is the ERC-721 which is used to create non-fungible tokens, NFTs.
Tokens are typically characterized by the following:
- Permissionless
- Programmable
- Trustless
- Transparent
Tokens tend to take on much wider use cases, such as representing both tangible (property, art) and non-tangible (processing power, governance rights) which cryptocurrencies are integral to the running of the blockchain network.
In Conclusion
Digital assets encompass a spectrum that includes both cryptocurrencies and tokens. Cryptocurrencies are constructed using their individual blockchains, whereas tokens are established atop pre-existing blockchains. The evolution of the blockchain sector and its regulatory landscape is an ongoing process, with the potential for the expansion of token standards and diverse applications spanning cryptocurrencies and tokens. This progression can pave the way for a wide range of social and economic solutions.
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