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Tokens and cryptocurrencies – a fundamental difference

4 min read


Cryptocurrencies have entered the mainstream. The chance to get rich through investing wasn’t just the subject of rap songs. Social media is also full of questions about “which coin is the most worthwhile now”. This sentiment in the market means that cryptocurrencies are valued primarily based on market capital. Accordingly, newcomers are wondering whether ETH/Ripple/Cardano/Solana could soon replace BTC.

This article is less about defending BTC and more about raising awareness of the cryptocurrency under consideration. After all, individual cryptocurrencies, various projects funded by ICOs and new hard forks are not simply about creating a token for gambling. If that were the case, we would be in the much-cited bubble, because then all projects would be worth nothing.

Of pocket knives and saws – coexistence of different use cases

In the course of ETH’s significant rise in price, the buzzword “flippening” has come up again and again in recent years: people were convinced that ETH would soon have a higher market capital than BTC. Some circles also went so far as to say that ETH would be “the better BTC”. It is often forgotten that different cryptocurrencies are often designed for different use cases.

ETH impresses with the possibilities of smart contracts: With the help of smart contracts on a blockchain, not simply automated processes are possible, but decentralized applications, the processing of which can be observed during runtime. The classic open source idea has been expanded to include the idea of ​​open execution.

One can imagine that smart contracts greatly expanded the idea of ​​classic blockchain technology, as known in the case of BTC. Accordingly, significantly more applications than that of a peer-to-peer currency are conceivable. With Initial Coin Offerings (ICOs) described below, such an application has received a lot of feedback.

In short, one could think that ETH is better than BTC, after all, ETH is much more possible. However, is it always better when many use cases are supported?

As a parable, the pocket knife could be compared to a saw: A Swiss pocket knife also contains a saw. Similar to Leathermen, these knives are tools that can be useful in a variety of situations – and often fit in your pocket.

But even if pocket knives combine the functions of screwdrivers, knives, saws, bottle and can openers, these tools have not disappeared from the market because they are a supplement for special applications and not a replacement.

The same can be said about ETH: ETH is not in competition with BTC, but complements the ecosystem of blockchain technology. Accordingly, both currencies can coexist wonderfully.

Coins and tokens – ça fait deux

If the monetary value is primarily considered and all investments remain on exchanges, the difference between cryptocurrencies and tokens becomes blurred. On Coinmarketcap Tokens are displayed together with cryptocurrencies in the default display. Nevertheless, tokens are named as such on Coinmarketcap and can be sold separately coins and tokens to be viewed as. The difference is important, as it can also help with the fundamental evaluation of an investment and with the technical classification of a project.

We speak of a cryptocurrency when it is a stand-alone solution, i.e. when it is a separate blockchain or a blockchain-like data structure. The protocol underlying these cryptocurrencies may be based on another cryptocurrency, but the previously existing cryptocurrency is only a role model. To put it more concretely: Litecoin or BTC Cash can exist independently of BTC, on whose code both protocols are based, and do not require BTC. An ecosystem of nodes, miners (if consensus is found on the basis of proof-of-work), developers and regular users is formed around individual cryptocurrencies.

Tokens, unlike cryptocurrencies, cannot exist without an underlying cryptocurrency. For example, they exist on the ETH blockchain and cannot exist independently of it. The big advantage of tokens is that they do not require a new infrastructure with their own nodes and miners. They are also much easier to generate than cryptocurrencies.

This simplicity also led to tokens being offered for ether as part of ICOs (Initial Coin Offerings). In this way, the project can quickly receive financial support from anywhere in the world. Some of the tokens are implemented in such a way that they contain the necessary functions for the envisaged project, often the investor only hopes to make a profit after selling them on one of the many crypto exchanges.

Whether cryptocurrencies or tokens – always look at the technology behind it

Questions as to whether ETH or other cryptocurrencies or tokens will be worth more than BTC at some point reduce the technical possibilities that blockchain-based cryptocurrencies bring with them to a minimum and make the difference between own cryptocurrencies and tokens fade.

The previous paragraphs are by no means meant as a reproach, but serve as a safeguard: when looking only at the money, when valuing cryptocurrencies only based on a technical analysis of the chart movements, there is a very good possibility that projects receive extremely wrong valuations. If that happens, one would eventually learn that the emperor is naked and blistering would ensue. The good news is that the investors themselves, if they are critical in their choice of investment, have it in their hands that it doesn’t come to that.

That’s why cryptocurrency needs Proof of Work (PoW)

All content in this article is for informational purposes only and in no way serves as investment advice. Investing in cryptocurrencies, commodities and stocks is very risky and can lead to capital losses.

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