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Well, hello there - it’s great to see returning faces and new readers (yes, we’re watching you). As we like to say: new week, new WBS adventure! (it’s actually our first time saying it, but it's kinda catchy). This week we’ll set the record straight about the terms “cryptocurrency” (or crypto coins) and “tokens.” You may have seen these terms used interchangeably, we may have even done it ourselves a few times (sorry), but they are not the same. While you may think you know the differences, it’s pretty nuanced, so we suggest you read on to make sure you’re never caught off-guard by a 14 year old with a Robinhood account asking you to explain.
Something to keep in mind before we continue: all cryptocurrency are tokens, but not all tokens are cryptocurrency. Let that sink in, now you have some basic “taxonomy.”
Let’s start by breaking up the word cryptocurrency; crypto and currency. Crypto refers to cryptography, and it’s one of the key elements underlying cryptocurrency and blockchain (one of the rare times we’ll provide a Wikipedia link because it’s a must read). Cryptography is the study of ways to send information between two parties securely and without the possibility of a third party intercepting, deciphering, or altering the data (very nice guide here) Hash functions and public/private keys (aka asymmetric keys) are some examples of encryption-related features used in modern cryptology based technologies like blockchain (very deep paper here). Because of how ingrained cryptography is to blockchain, the word crypto has become synonymous with blockchain-based currency.
Currency or sometimes coins (hence Bitcoin) are just that, a type of money or method of payment that represents a unit of value for storing and transacting like the cash in your pocket, your bank account, or your debit card. In the case of cryptocurrency - it’s used within a blockchain network or group of networks built on the same unique protocol and sharing a dedicated distributed ledger to keep track of transactions across all those networks (this is important as you’ll realize in a minute). And that is exactly what differentiates cryptocurrency from tokens: cryptocurrency is the base or the fundamental digital asset (currency) for ALL blockchain networks built using the same protocol, while a token is specific to a (usually) single network derivative or built from an existing protocol that may not have it’s own distributed ledger to keep track of transactions between wallets. Also, unlike cryptocurrency, which is typically only a form of payment, tokens can be used for things like voting rights, consensus, smart contract calls, products and services on their native network, DApp’s, etc. - that’s why they are often called “utility” tokens. I know, that’s still a bit confusing...let’s take a detour here to explain a bit about protocols, and then we’ll come full circle with examples of crypto other than Bitcoin (sometimes referred to as Altcoins) and tokens that will connect the dots.
In computer science, a protocol is a set of standards for communication between two or more devices (computers) on a network (free course on this and more here). Protocols are sometimes called technical standards and are to digital communication what programming languages are to computer programs or computations...but I digress (start with Wikipedia and go from there if you want to learn more). Blockchain protocols define things like how nodes communicate, the actual details related to consensus, how smart contracts are built, and technical standards for network tokens. Understanding that most blockchain networks are built on the same few main protocols is the key to understanding the difference between cryptocurrency and tokens.
Ethereum’s Ether (ETH) is a great example of a cryptocurrency that has spawned numerous tokens. Ethereum has many token standards; the most popular is called ERC-20. This standard, or set of rules related to the specifications of how an Etherum based token is built and functions, allows developers to use smart contracts to create their own ERC-20 tokens that can be used to capitalize and serve as utility on a new network, but that utilize Ethereum's blockchain for keeping track of transactions (via the Ethereum ledger) between their participants, can take advantage of Ethereum's vast number of nodes, and, important to note, must pay gas fees in ETH. ETH is in fact an altcoin, and there are at least a few other very popular ones you may want to explore: Litecoin (LTC), EOS, Ripple (XRP), Stellar (XLM), Cardano (ADA), Cosmos (ATOM), Tezos (XTZ), and Tron - but keep in mind there are about 5,000 coins and counting!
Here’s another better, stronger, and cooler named example to (hopefully) give you some clarity and depth; Prometheum’s own Ember token (MBR). MBR is a blockchain security of course, and yes, it’s a utility token - but it also behaves similarly to an altcoin or cryptocurrency, sometimes. We use the words “similarly” and “sometimes” because the Prometheum blockchain is a smart contract platform with its own protocol (just like Ethereum) that is specifically created to support networks whose tokens are also blockchain securities. When Prometheum maintains the ledger for “security” transactions of issuer tokens (on the Prometheum market), MBR is not functioning as a cryptocurrency because those transactions are not native issuer network transactions - regardless of the fact that gas fees/payments for those transactions are paid in MBR. But, Utility transactions, for products or services, consensus or DApps, that take place on the native network of issuers and are written to Prometheum’s utility chain (and paid for in MBR) do check all the boxes for MBR to fit the definition of cryptocurrency in this specific use case and context.
If that last paragraph is confusing at first, we suggest a re-read as it highlights the distinctions between crypto and tokens beautifully (if we don’t say so ourselves!) and will ultimately give you a deeper understanding of yet another deceptively simple concept from the world of blockchain.
To quote the great pet detective Ace Ventura, “Aaalrighty then!” We’re implementing a hard fork...sorry, meant to say hard stop (Freudian slip). Hope you’re looking forward to next week’s post as much as we are - thanks for taking the time and joining us. Have a great week, my fellow readers!