With the rapid growth of cryptocurrencies, it is important to understand the differences between the terminologies involved and what they refer to.
Cryptocurrencies have caught the eye of investors around the world. For all the interest around them, people find cryptocurrencies notoriously challenging to wrap their heads around. Several terminologies may seem confusing but aren't if you delve a little deeper. However, the confusion surrounding cryptocurrencies does act as a deterrent for individuals who may want to learn more about them and the underlying technology.
As more people look to get involved in the cryptocurrency space, it becomes essential to educate them about the differences between different crypto space assets. Here we take a look at the differences between coins, altcoins, and tokens. A lot of people get confused between coins and tokens, often considering them the same. The truth is that there are huge differences between them and their uses. This article aims to clear the confusion a little.
To understand Coins, Altcoins and tokens better, we must first understand what cryptocurrencies are.
What Are Cryptocurrencies?
Cryptocurrencies are digital currencies secured using cryptography. Securing cryptocurrencies through cryptography makes them impossible to counterfeit. Most cryptocurrencies base themselves on a decentralized network. Cryptocurrencies are not issued by any central authority or financial institution, which means that theoretically, they are immune to government regulation and interference.
Bitcoin was the first decentralized cryptocurrency, powered by a public ledger on which the records of all transactions are stored. Although not the first cryptocurrency, Bitcoin was an essential milestone in the history of cryptocurrencies.
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What Are Coins, Tokens, and Altcoins?
Coins, Tokens, and Altcoins are the three main types of cryptocurrencies, differentiated based on their use cases and the underlying technology. Bitcoin is a cryptocurrency coin because of its use as a transfer of value. ERC-20 platforms like Civic, which are built on Ethereum, are tokens. Tokens are not used as a transfer of value, unlike Bitcoin and other coins. Altcoins are coins that are an alternative to Bitcoin. They started with Bitcoin's code but modified it to a significant extent.
There are different types of coins, each with its use cases and strengths.
- Transactional coins: As the name suggests, transactional coins are a medium to conduct transactions.
- Store of value: These coins act as a store of value. An example of this type of coin would be Bitcoin.
Tokens vs. Altcoins
What Are Altcoins?
The simplest definition of an Altcoin is that they are an alternative to Bitcoin. Altcoins are built on the basic framework of Bitcoin and offer efficient ways to complete transactions on the internet. They aim to develop and improve upon the framework of Bitcoin by changing different characteristics of the framework.
Developers create altcoins through a fork of Bitcoin's original protocol. Changes made to the underlying codes create a new coin with new properties.
Altcoins work in the same way as Bitcoin. They enable individuals to send payments from one digital wallet to another using a private key. Transactions are recorded on a ledger, and anyone can scrutinize transactions. The public ledger ensures that transactions, once registered, cannot be altered in any way. The blockchain is secured through mining, a process where miners solve complex mathematical problems to validate transactions. Each Altcoin has different characteristics, each claiming to improve on the perceived shortcomings of Bitcoin.
Some altcoins are not derived from Bitcoin. These coins have created their protocol and blockchain and have their native currency. Examples of these altcoins are Ethereum, Ripple, Waves, etc.
What Are The Types Of Altcoins?
There are several types of Altcoins. Altcoins sufficiently change Bitcoin's rules to become unique and have a particular application. The main types of altcoins are stablecoins, utility tokens, security tokens, and mining-based currencies.
1. Stablecoins:
Stablecoins are designed to reduce volatility. They reduce volatility by tying the coin's value to traditional fiat currencies like the US Dollar, Euro, or assets like gold.
2. Mining based altcoins:
Mining based altcoins are generated through a process called mining. Mining is a process where miners solve complex mathematical problems to validate transactions. New coins are generated as a reward for the miners. Mining based altcoins are similar to Bitcoin. The best example of this type of Altcoin is Ethereum.
Advantages Of Altcoins
✅ Altcoins try to improve the Bitcoin framework's perceived shortcomings, focusing on factors such as mining costs or speed.
✅ Altcoins are alternatives to Bitcoin. Some altcoins give serious competition to Bitcoin.
✅ Altcoins have lower transaction fees than Bitcoin, which is a huge advantage to have over Bitcoin.
What Are Tokens?
Tokens represent an asset or a utility created on an existing blockchain. They represent assets that are tradable and fungible. These could range from commodities to other cryptocurrencies. Tokens are used for fundraising crowd sales; Ethereum is the most popular token platform. All tokens created on the Ethereum platform are called ERC-20 tokens. Apart from Ethereum, there are other platforms such as NEO, Lisk, and Stratus. Tokens on other platforms are different from ERC-20 tokens, which are exclusive to Ethereum. Tokens on the NEO platform are called NEP-5 tokens.
The creation of tokens is relatively simple. Miners will validate the transaction in exchange for ether. Tokens are mostly used with decentralized applications. Developers can decide how many tokens should be created and send the tokens once created. They can pay the blockchain in the blockchain's native currency when creating the token.
Once the token is created, Users can use it to avail of the applications associated with the token. An example of this would be the Binance token. Users who trade on Binance using the Binance token pay 50% less fees than users who do not use the token.
Tokens are distributed and sold through Initial Coin Offerings (ICO). ICOs are used to fund the development of the project. Tokens are also used for transactions on the blockchain that they have been created on. These transactions are carried out through smart contracts, where once certain conditions are met, the smart contract self executes to complete transactions.
Types Of Tokens
Tokens are categorized into different classes based on their use cases. The different types of tokens are Security tokens, Payment tokens, Equity tokens, and utility tokens.
1. Security tokens:
Tokens issued by ICOs are mostly security tokens. People who buy these tokens invest in the ICO, expecting to make a profit.
2. Equity tokens:
Equity tokens represent equity in the company that issues the token. There are very few equity tokens because hardly any company has attempted this type of ICO due to a lack of regulatory clarity.
3. Payment tokens:
Payment tokens pay for goods and services availed by an individual.
4. Utility tokens:
Utility tokens provide users with access to a product or a service. These tokens are in limited supply, making them rare and valuable.
How Do Tokens Work?
Tokens enable individuals to utilize decentralized applications built on blockchains. Cryptocurrency tokens reside on existing blockchains and represent an asset or a utility and are used to raise funds for crowd sales but have other uses. To understand how a token works let's look at the following examples.
An individual can have a token that gives him access to a certain number of loyalty points on a blockchain managing a retail chain. Another token may provide users access to a certain number of hours on a streaming service.
Cryptocurrencies and altcoins are digital currencies with their blockchain and are used as a medium to complete digital payments. Tokens operate on an existing blockchain. The blockchain acts as a medium that facilitates the creation of smart contracts and execution of decentralized applications. Tokens help facilitate these transactions.
Uses Of Tokens
The token industry is still in a nascent stage, making it challenging to categorize its uses. However, as blockchain technology matures, we will see different use cases for tokens. Tokens have the following uses
- As a reward for participants on a network
- Ensuring the security of the network
- As a mode of payment between two parties
- Ownership of digital assets.
Altcoins vs Tokens: Conclusion
There are massive differences between coins, altcoins, and tokens. Coins are native to their blockchain. Tokens exist on existing blockchains like Ethereum. Altcoins and tokens are different because altcoins are separate currencies while tokens operate on a blockchain. The majority of coins that exist are tokens.
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Virtual currencies are highly volatile. Your capital is at risk.