Digital Tokens Versus Digital Currencies

For many folks, digital currencies like Bitcoin, digital tokens, and digital assets are all the same thing. That fact is that they are not and that makes a difference. Anyone who wants to participate in the new digital asset world needs to know the difference between digital tokens versus digital currencies and another other digital assets. At the bottom of the pyramid, digital assets are both crypto tokens and cryptocurrencies. They run on the blockchain which is a digitally distributed, decentralized, public ledger that exists across a computer network. Because these are not tangible assets but rather representations in computer code there are many possible permutations of use for these assets.

What Digital Currencies and Tokens Have in Common

When sorting out the differences between cryptocurrencies versus tokens, both use cryptography which is an advanced form of encryption that reduces the risk of double-spending or counterfeiting. In each case these are assets that can be bought and sold via the internet between individuals anywhere on the earth so long as they have an internet connection. While there are potential risks of these systems being hacked, the basic tools are there to protect customer assets and transactions from hackers. As seen in the FTX mess, fraud at the highest corporate levels is not controlled by digital asset tools either with currencies or tokens.

Digital Tokens Versus Digital Currencies

How Digital Currencies and Digital Token Differ

Think of digital currencies as being at the base of the pyramid as native blockchain assets. Examples are Bitcoin (BTC) and Ethereum (ETH). Digital tokens use a pre-existing blockchain and its currency being built “on top” of the original structure. In the case of Ethereum, ERC-20 tokens are in the Ethereum world. Cryptocurrencies work as mediums of exchange fulfilling the original intent when Bitcoin was created. Today they are used to create incentives for maintaining security of the cryptocurrency network.

Tokens, on the other hand, are assets with value but not meant for direct use as currencies. They are used for gaming, in decentralized finance, and even assessment of services specific to a given platform. Ethereum has numerous tokens built on top of its ETH cryptocurrency. These include LINK, DAI, CryptoKitties, and COMP.

Integration of Crypto Tokens With Cryptocurrency Systems

The vast majority of tokens run off of the Ethereum system. However, the general principles fit any token to currency combination. The coding within the blockchain is such that the token is interoperable with the larger system. There are currently thousands of tokens in the Ethereum system. Tokens are generally programmable, trustless, permissionless and transparent. Programmable simply means that the asset runs on a computerized network or blockchain.

What Do Trustless and Permissionless Mean for Digital Tokens?

An asset being without trust does not, on the face of it, inspire confidence. Trustless refers to the fact that these blockchain derived assets do not require a centralized authority like a bank or government. It runs according to predefined network protocol rules. These assets are available to all who are interested and able to be verified as well. The permissionless part refers to not needing specific credentials to take part in the crypto system that supports the token. This has been a “selling point” for decentralized finance since its inception, especially for folks without access to traditional banking or other financial services.

What Assets Do Digital Tokens Represent?

Digital tokens represent other assets which can be either physical or digital. They also can represent services. Examples include art, real estate, data storage space, and processing power. They commonly are used as mechanisms for governance for things like protocol upgrades. The creation of these tokens is called tokenization.

Regulation and the World of Cryptocurrencies and Crypto Tokens

For years folks in the crypto world were afraid of regulation. Then came crypto winter and a wave of bankruptcies and evidence of fraud mixed with incompetent business dealings. Thus it became clear that a degree of regulation is and was necessary. But, how much? The VP of the Federal Deposit Insurance Corporation thinks that the regulators need to back off a bit, to soften their stance. It is important that problems in crypto such as billion-dollar businesses being mismanaged and committing fraud, should not spill over into the banking system and general economy. Nevertheless, it is important that regulators use a light enough hand that innovation and potential benefits in the worlds of cryptocurrencies and tokens are allowed to happen.

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