The difference between cryptocurrencies and crypto tokens is something that very few users are aware of. Because of this, a lot of people now use the terms interchangeably. The major difference between the two is that cryptocurrencies are native assets based on particular blockchains. The blockchains determine the core functions and utility of cryptocurrencies.
Crypto tokens, on the other hand, are secondary assets that are built on existing blockchains. They are not core assets of the blockchain they are based on and they do not determine how the blockchains function. Each blockchain has only a single native cryptocurrency whereas there will be many crypto tokens built on a particular blockchain.
In this article, we will learn in detail about cryptocurrencies and crypto tokens and the major differences between them.
What Are Cryptocurrencies?
Cryptocurrencies are the native digital currencies of a particular blockchain. They determine the basic functions and the overall utility of the blockchain. Every blockchain has a single native cryptocurrency exclusive to it. For instance, the native cryptocurrency of Bitcoin is BTC, Ethereum is ETH, and Solana is SOL.
Cryptocurrencies serve a purpose for the concerned blockchains. They are used basically to incentivize the individuals, groups, or organizations that contribute to the development and day-to-day functioning of the blockchain.
The blockchains are part of a distributed network and are based on various computers around the world. These computers are otherwise called nodes and they play a vital role in securing the particular blockchain to ensure its safety. The cost of maintaining a blockchain is also distributed among these nodes.
The node operators are incentivized for their contribution using the native cryptocurrency of the blockchain. Thus the node operators will be able to meet the costs of hardware and software infrastructures. They are also compensated for the work of processing, validating, and adding new transactions using this native cryptocurrency.
What Are Crypto Tokens?
Crypto tokens are not native to the blockchain on which they are built. Their functions are determined by the tokenization standards, which serve as a blueprint to show the design, behavior, and operation of a token. The crypto tokens are used, stored, and exchanged based on these standards.
An example of a token standard is ERC-20, which is followed by most crypto tokens. ERC-20-compliant crypto tokens are usually built on the Ethereum blockchain network. There are BEP-20-compliant tokens built on the Binance smart chain and SOL tokens, which comply with the token standards of the Solana blockchain network.
Crypto tokens are created with special smart contracts that run on blockchains and they determine the token’s total supply, issuance, features, and functions. Crypto tokens have utility on specific platforms. They can be used to represent a wide variety of commodities such as gold or real estate goods, financial instruments such as derivatives contracts, fiat currencies such as stablecoins, digital assets such as non-fungible tokens, company ownership, or voting rights on a decentralized ecosystem.
Similarities And Differences Between Cryptocurrencies And Crypto Tokens
Cryptocurrencies and crypto tokens are different in terms of the purpose that they serve. On blockchains, cryptocurrencies make network activity and security easier. The blockchains are thus kept economically viable and the node operators are incentivized through the cryptocurrency networks.
On the other hand, crypto tokens have more utility than mere holding and exchange of value. They represent a wide range of use cases such as decentralized voting rights, digital collectibles, and NFTs, or even blockchain-based versions of real-world assets like the US dollar.
Despite this major difference between the two, cryptocurrencies and crypto tokens share several similarities. Both cryptocurrencies and crypto tokens are entirely built on blockchains. They use cryptography and blockchain technology for their day-to-day functioning. They can be used as a medium of exchange whose value changes with the changes in supply and demand. Both cryptocurrencies and crypto tokens run based on the principles of decentralization.
The Bottom Line
Cryptocurrencies and crypto tokens represent two different types of assets with different use cases. They are vital for the transactions on the Web 3 networks. They are non-interchangeable, i.e., one cannot be used to represent the other. You must understand the similarities and differences between the two before investing in cryptocurrencies and crypto tokens.
