Having just launched our first ICO, we feel it is the right time to unravel the mystery of digital tokens. Since the blockchain space has grown from the grassroots and continues to evolve daily, it is not unusual for a cutting-edge sector like this to lack clarity on industry terminology. Currently, both language and terminology are lagging behind the blockchain technology.
Two terms that can cause particularly much confusion are “coins” and “tokens”. Although their meaning and usage overlap considerably and they are often used interchangeably, there are quite a few stark differences. Here’s our simple guide to understanding how tokens differ from coins.
What is a cryptocurrency?
To get to grips with the entire blockchain ecosystem, we need to start with understanding the definition of cryptocurrencies. What is a cryptocurrency? It is a virtual currency secured using cryptography, a science of encryption techniques that secure and verify the transfer of transactions. Although many cryptocurrencies existed before Bitcoin, it is the first decentralized digital currency, powered by blockchain, a public ledger that records and validates all transactions chronologically. The advent of bitcoin has birthed an explosion of other coins and tokens, which are often considered to be cryptocurrencies, even if they don’t fall under the definition of a “currency”.
What is a digital coin?
Digital coins are also known as “altcoins”, and these terms are often used interchangeably. They’re referred to as “altcoins” simply because they are an alternative to bitcoin. There are two types of altcoins - native coins that are based on their own native blockchain and altcoins that are variants of bitcoin, derived from bitcoin’s open-source protocol.
For example, coins derived from the bitcoin blockchain include Litecoin, Namecoin, Peercoin, Auroracoin or Dogecoin. Good examples of native coins include ether, Ripple, Nxt, Waves and Omni. Both types of altcoins share the same common trait of possessing their own independent blockchain.
What is a digital token?
Digital tokens represent a particular asset or utility and usually function on top of another blockchain, most commonly - Ethereum. Tokens have become a big deal because they can represent almost any asset that is tradeable and fungible, from commodities to loyalty points to diamonds and precious metals!
One of the best analogies used to explain how asset-backed tokens work comes from the good old days when people were crazy about gold. In those times, one could walk into a goldsmith shop, park some gold with a goldsmith and leave the shop with a receipt or an “I Owe You” (IOU) note from them. If the latter was the case, the note could be passed around and go from person to person -- anyone holding the note could claim the gold from the goldsmith.
Asset-backed tokens are the digital equivalent of the IOU notes. They represent an underlying asset (like gold) that you can claim from the issuer. As tokens change hands, all transactions are recorded on the blockchain. To claim the underlying asset, all you need to do is send your token to the issuer, and the issuer sends you the asset.
As mentioned earlier, tokens can represent basically any asset, including fiat currencies (EUR, USD, etc.), various issuer’s services, art, music, precious metals, coupons, and many more.
Think about tokens as a hybrid between a Kickstarter campaign and a stock market flotation. On one hand, as a backer, you get the exclusive right to reserve the future product before it hits the wider market (that’s the Kickstarter part); and on the other hand, as an investor, you get a stake in the company in the form of potential future profits - if the product grows in popularity and demand, the value of the tokens you hold will soar, creating a cash-in opportunity (that’s the stock market part).
Why are tokens making waves in the crypto space?
Ethereum, the blockchain technology that powers most of the tokens circulating in the market today, has been called a “token factory”. That’s because of a rapidly growing number of blockchain-based projects doubling down on the opportunity to raise funds through Initial Coin Offerings (ICO’s). To date, we’ve seen more than 230 ICO’s attempt to source funds in 2017, collectively raising nearly $3.8 billion.
What is going on here? The explanation is really rather simple. The potential of the blockchain technology has attracted scores of talented developers, who are eagerly working on innovative and never-before-possible ideas and products. And as traditional venture capitalists are just starting to dip their toes in the world of crypto assets, ICOs have come to represent an almost irresistible alternative.
Besides that, as a new method of raising funds, public crypto crowdsales have some handsome advantages compared to traditional VC fundraising. Token sales are seen as an opportunity to reinvent the “freemium” business model of the internet. Instead of enticing users with free services, paid by venture capital, and eventually earning a profit by advertising to those users (think Facebook, Google, LinkedIn, etc.), new tech companies use token offers to create a direct avenue of revenue streaming from their users.
The way token sales work is pretty straightforward. If having studied the whitepaper and product offering, users feel it has the necessary potential to create value and grow into something substantial in the future, they pay upfront, giving developers enough funds to build and develop the product as advertised. If the promise is upheld, the product should gain mass appeal and grow in demand, rewarding early investors and adopters in the form of appreciating token prices.
It’s worth mentioning that every token sale will have different rules around the specific purpose of their token as well as the total supply of tokens. ICO’s are growing in popularity mainly because they give power to users to “vote” with their coins and bring those projects to life that can create the most value for them.
What are some consumer-based uses of digital tokens?
While blockchain evangelists believe that the said technology will have a seismic impact on the area of trade finance and the banking industry, those less knowledgeable about the crypto space still struggle to see real-life consumer-based uses of decentralised networks and digital tokens. Let’s look at some of the possible examples that can improve the day-to-day lives of thousands of consumers.
Banking is, of course, one of the best examples to entertain. Ripple, a blockchain-based global payments company that touts a frictionless experience in sending money worldwide, offers an explanation: “In a world where three billion people are connected online, cars drive themselves and appliances can communicate, global payments are still stuck in the disco era. Why? The payment infrastructure was built before the Internet with few updates.” Thanks to its decentralised nature, Ripple can offer instant, on-demand payments, real-time traceability of funds and lower operational costs, which all greatly benefit the user.
Gatcoin is another interesting example. This blockchain startup is using the technology and tokens to revolutionise the experience of online shoppers. It is built to allow retailers to create their own tokens, which can be used to buy products, claim rewards or get discounts. These tokens can be freely traded on Gatcoin’s cryptocurrency exchange, making them a highly liquid asset.
Since our humble beginnings in 2012, we have grown into a full-blown fintech company that enables investors to earn a passive income through peer-to-peer loans. It’s a viable and effective investment vehicle that marries perfectly with the benefits of the decentralised blockchain technology. But while it has grown exponentially in the past few years, it is still a yet-to-be-discovered alternative to many savvy savers and investors. We hope that our two-month-long ICO will give us the opportunity to show the crypto community how they can benefit from investing, borrowing and exchanging in both crypto and fiat currencies, without possessing the technical knowledge of crypto and blockchain technology.
Spelling out the primary differences between tokens and coins
Let’s recap on what we’ve covered so far.
“Coin” is a term commonly used to describe cryptocurrency coins that act like money, both native coins like bitcoin, ether and Ripple and coins that are basically variants of bitcoin built atop bitcoin’s blockchain, like Litecoin or Dogecoin.
Tokens, on the other hand, are a representation of any asset that the issuer chooses to put forward. This could mean a wide selection of underlying assets, ranging from diamonds to loyalty points to fiat currencies.
The easiest way to understand the difference between coins and tokens is to think in broad strokes: coin = cash, token = everything else.