Crypto Coins vs. Token: Understanding the Difference
Prepared by: Wilmina
Nearly everybody has confused a token for a coin at some point in their cryptocurrency journey.
The truth of the matter is that coin and token are a lot of the same on a fundamental level. They both represent value and can process payments. You can likewise swap coins for tokens and vice versa.
The primary distinction between these two comes down to utility. There are things you can do with tokens and not with coins. Then again, some marketplaces will acknowledge coins and not tokens.
The crypto industry has said that the key distinction between coins and tokens is that crypto coins are the native asset of a Blockchain like Bitcoin or Ethereum, whereas crypto tokens are created by platforms and applications that are built on top of an existing Blockchain.
When Bitcoin first came out, it set the standard for what it means to be a coin. There are clear-cut qualities that distinguish crypto coins from tokens, which are like real-world money.
What is a Crypto Coin?
A blockchain can only have one native asset (coins) whereas, it can have hundreds of tokens built on top of it. Example – ETH is the native crypto coin of the Ethereum Blockchain.
Elsewhere, a coin is native to its Blockchain. It uses its own Blockchain and keeps track of the datastores value, validates transactions, and keeps the Blockchain secure.
A coin is defined by the following characteristics:
- Operates on its blockchain. A blockchain keeps track of all transactions that involve its native crypto coin.
When you pay someone with Ethereum, the receipt goes to the Ethereum blockchain. If the same person pays you back later with Bitcoin, the receipt goes to the Bitcoin blockchain. Each transaction is protected by encryption and is accessible by any member of the network.
- Built on a blockchain or other Distributed Ledger Technology (DLT), which allows participants to enforce the rules of the system in an automated, trustless fashion. Uses cryptography to secure the cryptocurrency’s underlying structure and network system.
- Acts as money. Bitcoin was created for the sole purpose of replacing traditional money. The paradoxical appeal of transparency and anonymity inspired the creation of other coins, including ETH, NEO, and Litecoin.
You can purchase merchandise and services from many major corporations today, such as Amazon, Microsoft, and Tesla, using crypto coins. Bitcoin has recently become an official currency of El Salvador alongside the US dollar.
- Can be mined. You can earn crypto coins in two ways. One is through traditional mining on the Proof of Work Bitcoin hunters employ this method to boost their earnings. The problem with this is that there aren’t that many Bitcoins left to mine, so the process becomes more arduous every day.
The other method is Proof of Stake, which is a more modern approach to earning coins. It’s lighter on energy consumption and easier to do. Cardano is one of the biggest coins that adopt this system.
- Decentralized, or at least not reliant on a central issuing authority. Instead, cryptocurrencies rely on code to manage issuance and transactions.
List of Top Blockchain in 2022 and its native coins
|Ethereum – ETH||Binance Smart Chain – BNB||Cosmos – ATOM|
|XDC Network – XDC||Cardano – ADA||Algorand – ALGO|
|Stellar – XLM||Polkadot – DOT||Klaytn – KLAY|
|Tezos – XTZ||Solana – SOL||IOTA – MIOTA|
|Tron – TRX||Polygon – MATIC||Avalanche – AVAX|
|Hedera Hashgraph – HBAR||VeChainThor – VET||Elrond – EGLD|
|EOS – EOS||NEO – NEO||Waves – WAVES|
What is a Token, Its characteristics, and Functions?
- Tokens exist in a digital record on the blockchain. But tokens aren’t money, as money is typically understood. Instead, they represent things.
- A Token is built on top of the Blockchain, like Ethereum Blockchain, there are many other different tokens that also utilize the Ethereum Blockchain. Some of the most seen tokens on Ethereum include STKR, BAT, BNT, Tether, LINK, USDT, and various stablecoins like the USDC.
- Typically, token coins are used for governance, transactional fees, and other related use cases.
- Experts say that they are the infrastructure and the backbone of the Blockchain.
- To create a token, there is no need to create a Blockchain and write the entire code and worry about how transactions would be validated; instead, create a token and it runs on someone else’s Blockchain. This means there is no need to keep improving the entire system, updating how it works, and patching vulnerabilities – the team can solely focus on providing a great project. The token team can rely on the coin’s network to provide safety and stability for the network.
- Tokens are created by businesses. They give the owner the right to use that company’s product or service in the future.
- Often a Token represents physical or intellectual property, such as a work of art, a piece of music or a book. The best-known example of this is the non-fungible tokenor NFT.
- When a token is spent, it physically moves from one place to another. A great example of this is the trading of NFTs (non-fungible tokens.) They are one-of-a-kind items, so a change in ownership must be manually handled. NFTs often carry only sentimental or artistic value, so in a way, they’re similar to utility tokens, except you can’t oblige any services.
- Token is different from coins because crypto coins do not move around, only account balances change. When you transfer money from your bank to someone else’s, your money doesn’t go anywhere. The bank changed the balances of both accounts and kept the fees. The same thing happens with blockchain – the balance in your wallet changes, and the transaction notes that.
- You can buy tokens with coins, but some tokens can carry more value than any of them. For example, a company’s share. However, since there are usually restrictions to where you can spend a token, it doesn’t have the liquidity a coin offers.
- On a broader scale of things, tokens existed long before cryptocurrency was a thing. Even today, it has very little to do with crypto at all.
- Everyone has used a token at least once in their life. That dinner for two vouchers you got in the mail is a token. Your car title is a token. When you sell your car, you transfer the value of that title to someone else. However, you can’t go to Microsoft and buy a computer with that title or dinner voucher.
- Another interesting thing about tokens is how easy it is to create one. Some networks like Ethereum provide templates where you can brand your tokens and start trading. This makes it so anyone with little to no technical knowledge can become a market maker. You’ll find a high density of this type of activity on decentralized exchanges, such as Uniswap.
- There are many other different tokens that also utilize the Ethereum blockchain. Crypto tokens built using Ethereum include DAI, LINK, COMP, and CryptoKitties, among others. These tokens can serve a multitude of functions on the platforms for which they are built, including participating in decentralized finance(DeFi) mechanisms, accessing platform-specific services, and even playing games.
- Typically, crypto tokens are programmable, permissionless, trustless, and transparent. Programmable simply means that they run on software protocols, which are composed of smart contractsthat outline the features and functions of the token and the network’s rules of engagement.
Permissionless means that anyone can participate in the system without the need for special credentials.
Trustless means that no one central authority controls the system; instead, it runs on the rules predefined by the network protocol.
Transparency implies that the rules of the protocol and its transactions are viewable and verifiable by all.
The most significant distinctions between tokens and coins.
Coins and tokens both represent a store of value, much like fiat currency, such as dollars, euros, yen, etc. But there’s a crucial difference: digital coins are a form of money, while digital tokens represent something that can be assigned a price.
|Represent: Digital version of money||Represent: assets or deeds|
|Denotes: capability of ownership||Denotes: what you own|
|Built on Blockchain||Do not have blockchain, built and operate on on existing blockchains.|
|Handled by Blockchain and uses Smart contracts||Rely on smart contracts|
|Crypto coins have higher intrinsic value as they form the foundation of the Blockchain.
|Tokens can represent a myriad of real-world use cases, including gaming, Stablecoins, NFTs, and other fees|
|In buying products – need coins||If availing service – can use token utility|
|Capital-intensive, complex process. It requires programmers, machinery, money, and organization.||Can be created by anyone with a computer and something to tokenize. The software to do so is readily available on a variety of platforms.|
As the blockchain industry keeps on innovating, the quantity of remarkable advanced resources will just keep on developing as per the multi-layered necessities of all Ecosystem participants going from big business accomplices to individual users. Considering that making new resources inside the Web3 world is less prohibitive than in the physical domain, these digital resources are broadly expected to further develop the manner in which endless ventures work, cooperate, and produce esteem, consequently empowering a huge range of new social and financial possibilities outcomes.
DeFi Built-In 4 Elements
Cryptocurrency, the new global money for the internet age, is also a medium of exchange like other currencies.
A cryptocurrency is a digital currency that acts as an asset that can be exchanged between two parties resulting in a transaction. The transaction is secured using cryptography; therefore the term cryptocurrency was connected. Cryptocurrency is a combination of “cryptography” and “currency”.
Cryptocurrencies use a decentralized technology that allows users to do transactions securely without the help of an intermediary moderator like a bank.
Cryptocurrency is a system that is neither regulated by any centralized authority nor tracked by any financial institution.
This digital asset is supported by a technology called BLOCKCHAIN.
Blockchain is a peer-to-peer network of nodes also known as BLOCKS containing all the transaction details at each stage between the two parties.
These blocks are linked and get security using cryptography.
What is Cryptography?
It is the study of secure communications techniques that allow only the sender and intended recipient of a message to view its contents The term is derived from the Greek word kryptos, which uses means hidden.
It is closely associated with encryption, which is the act of scrambling ordinary text into what’s known as ciphertext and then back again upon arrival.
In simple words, cryptography is a study of secure communication, one person will encrypt a message and the other person can decrypt it.
Why is Cryptography needed?
Cryptography is frequently expected to keep delicate information from being compromised and taken by individuals who are not intended to see it. This information can be military, financial or monetary, scientific (logical), mathematical (numerical), medical (clinical), and so forth in beginning. There is an extraordinary measure of justifications for why a wide range of individuals needs to keep certain information secret.
When presented to the wrong sources, some data might be a danger to public safety. For instance, atomic launch codes, the passwords to the entrances to weapons or contamination disease holding centers like CDC testing offices and things of this nature all should be kept secret to safeguard public safety. Cryptography makes it workable for just the suitable individuals to approach the sensitive data of importance.
How do Cryptography works?
There are various ways that cryptography might be applied to a piece of information.
Before the times of modern technology, transposition ciphers were used to modify the letters in a message. For instance, a message that read NRGEE SRGAS might be put through an interpretation code to reposition the letters, so they read GREEN GRASS. This is a very basic use of the concept of cryptography. Nonetheless, it was extremely famous in ancient times.
The strategies for carrying out cryptography to information have become fundamentally more complex. Presently, extraordinarily complex computer and mathematical technology can be used to encrypt information in more complicated ways than ever before. A portion of this technology is presently being used for modern-day cryptocurrencies.
Regardless of how complicated cryptography is, it always works on a similar basic principle; encrypt information and hide its true meaning so just only a person with permission can unravel it.
Role of Cryptography in Cryptocurrency.
Cryptography is an essential mechanism for securing information in computer systems. Without cryptography, cryptocurrency is just a central hub for attackers and scammers.
Cryptocurrency requires cryptography for mainly three (3) purposes;
- To secure the transactions
- To control the creation of additional units
- To verify the transfer of assets.
To accomplish all these things, cryptocurrencies depend on what is called, “public key cryptography”.
This paper discusses the types of cryptographic techniques used in cryptocurrencies, studies their characteristics, and explores the working of these techniques.
- Blockchain Technology
Blockchain is a relatively new method of storing data online, which is built around the two core concepts of encryption and distributed computing.
Encryption means that the data stored on a blockchain can only be accessed by people who have permission to do so – even if the data happens to be stored on a computer belonging to someone else, like a government or a corporation.
Distributed computing means that the file is shared across many computers or servers. If one copy of it does not match all the other copies, then the data in that file isn’t valid. This adds another layer of protection, meaning no one person other than whoever is in control of the data can access or change it without the permission of either the person who owns it or the entire distributed network.
Put together, these concepts mean data can be stored in a way so that it is only ever under the control of the person who owns it, even if it happens to be stored on a server owned by a corporation or subject to the control of a local government. The owner or government can never access or change the data without the keys to the encryption that proves they own it. And even if they shut down or remove their server, the data is still accessible on one of the hundreds of other computers that it’s stored on.
- Smart Contract
Smart contracts are like pieces of code that run on blockchain-based networks. Once deployed, they operate as programmed where users can rely on them to be unstoppable and censorship-resistant.
A smart contract is a self-executing contract with the details of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained in that exist across a distributed, decentralized blockchain network.
Smart contracts refer to digital transaction protocols that utilize the blockchain to enforce an agreement automatically while doing away with any third party. The terms of the agreement are written in computer codes, containing rules and penalties that the parties must agree to before entering one.
The transactions through this means are immutable and transparent, enabling the parties involved to audit and validate the data as and when needed.
Even though smart contracts are irreversible, developers can adopt indirect ways of updating the codes or clauses for the terms of an agreement if required.
Smart Contract Three (3) TYPES or Categories:
- Smart Legal Contracts – These contracts are legally enforceable and require the parties to fulfill their contractual obligations. Failure to do so may result in strict legal actions against them.
- Decentralized Autonomous Organization (DAO) – These are blockchain communities that are bound to specific rules coded into blockchain contracts combined with governance mechanisms. Hence, any action taken by the community members gets replaced by a self-enforcing code.
- Application Logic Contracts – These contracts contain an application-based code that remains in sync with other blockchain contracts. It enables communication across different devices, such as the merger of the Internet of Things with blockchain technology.
What is the purpose of a smart contract?
On a blockchain, the objective of a smart contract is to simplify business and trade between both anonymous and identified parties, sometimes without the need for middlemen. A smart contract downsizes customs and costs related to traditional methods, without compromising authenticity and credibility.
Which blockchain has smart contracts?
The most popular blockchain for running smart contracts is Ethereum. On Ethereum, smart contracts are typically written in a Turing-complete programming language called Solidity, and compiled into low-level bytecode to be executed by the Ethereum Virtual Machine.
Who writes smart contracts?
Anyone can write a smart contract and deploy it to the network. You just need to learn how to code in a smart contract language and have enough ETH to deploy your contract.
Is Bitcoin a smart contract?
Many think that smart contracts are only executable on overly complex blockchains, but Bitcoin is a smart contract platform by definition.
Is Ethereum a smart contract?
As the Ethereum website puts it, “Ethereum is a decentralized platform that runs smart contracts.” These contracts run on the “Ethereum Virtual Machine (EVM),” a distributed computing network made up of all the devices running Ethereum nodes
Smart Contract Three (3) Main Components
- Signatories (parties)
- The subject of the contract
- Contract Terms
The parties involved must satisfy the terms of the agreement (a set of rules and penalties) for a successful transaction.
Besides eliminating the need for an intermediary, executing agreements through digital contracts is considered cost-effective and secure.
More so, the decentralized blockchain network ensures that transactions remain transparent, traceable, and irreversible.
How many smart contracts are there?
Smart contract deployment
As of December 19, 2021, there are currently 929 smart contracts live on Cardano’s mainnet, which are mainly focused on DeFi, following September’s Alonzo upgrade. Thanks to Alonzo, developers can now create DeFi protocols such as DEXes and lend/borrow platforms on the Cardano blockchain.
Prepared by: Wilmina Dela Pena
DeFi (Decentralized Finance)
Overview of Centralized Finance
To better understand DeFi, we must review the characteristics of centralized finance:
- A central authority controls the flow of money and its minting
- A central authority controls who can and can’t hold funds (have a bank account, access financial instruments)
- A central authority sets rates and can change them at will
- Their main purpose is to profit off of their customers
Overview of Decentralized Finance
Decentralized Finance takes a drastically different approach to financial instruments.
- Money flows directly between users
- Anyone is able to participate, provided they have a wallet and funds
- Rates are set by market demand (i.e., users themselves)
- DeFi applications are normally transparent and benefit the user
DeFi in Depth
Low Level – Technology
Decentralized finance applications are built on smart contracts. ****A smart contract is simply a program that defines logic for what a user can do, and how the contract handles money. Smart contracts are very powerful, and form the basis for powerful centralized finance alternatives, such as lending and borrowing apps like Compound, or trading applications like Uniswap or dYdX Exchange.
The language used to program smart contracts varies by blockchain. Here are a few for some popular blockchains.
- Ethereum: Solidity (Ethereum’s native language)
- Tezos: Python, LIGO, Michelson (Tezos’ native language)
- Algorand: Python, TEAL (Algorand’s native language)
Higher Level – Economy
DeFi applications fit together like puzzle pieces to create a market. The parameters of these markets are set by the flow of value between users. For example, on decentralized exchanges (DEXes), prices of assets are determined by how much of a certain asset is in a trading pool pair — if there’s more of Token A than Token B in a pair, Token B’s price will be higher relative to Token B (1 Token B = many Token A, but 1 Token A = a little bit of Token B). In lending/borrowing applications, interest/lending rates are determined by how much of an asset is available to borrow, rather than being determined by a central authority. In most cases, such parameters are governed by simple supply-and-demand principles, however there are algorithms more complex than that.
Applications that provide core functionality to a market are called DeFi primitives or just primitives. Derivative & synthetic markets, along with DEXes and lending applications comprise this group. Anyone may build on top of these primitives to create financial applications with even more value and use. For example, yield aggregation apps build on top of different lending applications, all of which have varying markets. These apps switch lending users’ funds so that they receive the best interest for providing their money to borrowers.
Another important part of any DeFi ecosystem is the ability to realize real-world value. This is achieved with stablecoins, assets whose values are meant to mirror those of their real-world counterparts. Stablecoins can track the value of fiat currencies, like the Euro or US Dollar, commodities like gold or silver, or even stocks. Usually, fiat stablecoins, and sometimes commodities are their own standalone assets, and are backed with real reserves of their respective assets, and others commodities and stocks are realized through synthetic markets (the synthetic asset isn’t acutally backed by the real-world counterpart, but people agree to trade it at the price it is in real-life).
Decentralized Finance Built-in Four (4) Main Thing/Elements
- Blockchain Technology
- Smart Contract
6 Pillars of Decentralized Finance
- Stable Coin
- Lending and Borrowing
- Decentralized Exchanger
- Margin Trading
- DAO (Decentralized Autonomous Organization)
By: Wilmina Dela Pena
DeFi is an essential component of blockchain-based networks. DeFi is a collective term for financial services/equipment on public peer-to-peer blockchain networks. With DeFi, you have the same services that existed in the traditional financial world, where you can earn interest, borrow credit, lend, insure, trade derivatives, assets, and more. However, an important division of legacy finance is that through DeFi, this process is not only faster but also decentralized. In short, these services are global, peer-to-peer, pseudonym, and open to everyone.
DeFi is a collective term for financial products and services accessible to anyone who can use Crypto over an internet connection. With DeFi, the market is always open, and no centralized authority can block payments or deny access to anything. Services that were previously slow and at risk of human error are now automated, more secure, and handled by code that anyone can inspect and audit.
There is a booming crypto-economy where you can lend, borrow, long/short, earn interest, and more. Cryptographic savvy Venezuelans used DeFi to avoid catastrophic inflation. Companies are starting to stream employee wages in real-time. Some have borrowed and repaid millions of dollars worth of loans without needing a personal ID.
DeFi vs. traditional finance
One of the best ways to see the potential of DeFi is to understand the problems that exist today.
- Some people aren’t granted access to set up a bank account or use financial services.
- Lack of access to financial services can prevent people from being employable.
- Financial services can block you from getting paid.
- A hidden charge of financial services is your personal data.
- Governments and centralized institutions are free to close the market.
- Trading hours are often limited to business hours in a particular time zone.
- Remittances can take several days due to internal human processes.
- Financial services have a premium because intermediaries need their share.
|You keep your money.||Your company holds your money.|
|You control where your money goes and how it is spent.||You need to trust the company to avoid accidentally managing your money B.Loans to high-risk borrowers.|
|The transfer will take place within minutes.||Due to the manual process, payment may take several days.|
|Transaction activity is a pseudonym.||Financial activity is closely related to your identity.|
|DeFi is available to everyone.||To use financial services, you need to apply.|
|The market is always open.||The market is closed because employees need breaks.|
|Because it is based on transparency, anyone can see the product data and see how the system works.||Financial institutions are closed books. It is not possible to request a record of credit history or assets under management|