The two most common blockchain-based digital assetsAsset An economic resource with value that an individual or organization owns, controls, or expects future benefits from. Examples of assets: gold, stocks, cryptocurrencies, etc. are cryptocurrencies and crypto tokens (or more simply token). Just like all other cryptocurrencies, tokens are units of value or digital assets created, issued and managed on blockchain. However, even though they share some similarities, cryptocurrencies and tokens are two distinct categories of digital assets. The main difference lies in their relationship with blockchains.
In fact, cryptocurrencies like Bitcoin or Ethereum have their own dedicated blockchains, while tokens like Dogecoin, DAI or SHIBA INU are built on pre-existing blockchains. Each blockchain has only one cryptocurrency, but may have hundreds or thousands of crypto tokens. Cryptocurrencies have the freedom to tailor their blockchain to their specific needs and functionalities, while tokens leverage the infrastructure and security of existing blockchains to introduce new applications and use cases.
Furthermore, cryptocurrencies are primarily born as a medium of exchange just like traditional currencies. This means they are designed to facilitate peer-to-peer transactionsTransaction Exchange of value, property, or data between two parties. and serve as a store of valueStore of value An asset or commodity that maintains its purchasing power over time.. Tokens, on the other hand, encompass a broader range of functionalities, encompassing assetAsset An economic resource with value that an individual or organization owns, controls, or expects future benefits from. Examples of assets: gold, stocks, cryptocurrencies, etc. ownership, access rights, voting power, and even gamification elements.
Tokens are not simple digital currencies, but the representation of a digital asset. We could think of tokens as casino chips, or as game room tokens: they have the value of currency only in the context in which they are used.
The most common type of crypto tokens are ERC-20 tokens on the Ethereum blockchain, but other platforms have their own tokenization standards like BEP-20 on Binance Smart Chain or SPL on Solana.
Types of Tokens
Tokens can be broadly categorized into several types, each designed for specific use cases:
- Utility Tokens: These tokens provide users with access to a specific product or service within a blockchain platform. They are often used to pay for transactionTransaction Exchange of value, property, or data between two parties. fees or access advanced features. Examples include Binance Coin (BNB) and Ethereum’s Gas.
- Security Tokens: Security tokens represent ownership in an underlying asset, similar to traditional securities. They often grant holders financial benefits, such as dividends or revenue shares. Security tokens must comply with relevant financial regulations.
- Governance Tokens: These tokens give holders the right to participate in the decision-making processes of a blockchain networkNetwork The set of computers connected to each other, called nodes, on which the blockchain of a specific cryptocurrency is based.. Voting on protocol upgrades, proposals, or changes to the platform’s rules are common use cases for governance tokens.
- Stablecoins: Stablecoins are pegged to the value of traditional fiat currencies to minimize price volatility. Tether (USDT) and USD Coin (USDC) are examples of stablecoins commonly used for tradingTrading Trading is a speculative activity of buying and selling financial assets aimed at profit. and as a store of value.
- Non-Fungible Tokens (NFTs): NFTs are unique digital assets that represent ownership of specific items, often digital art, collectibles, or in-game items. They use blockchain technology to certify authenticity and ownership.
Creation Processes: Mining and Minting
Cryptocurrencies like Bitcoin and Ethereum are created through a process called mining. Miners are computers that solve complex mathematical problems in order to validate transactions and add new blocksBlock A set of encrypted transactions that, in sequence with other blocks, constitutes a blockchain. to the blockchain. In return for their work, miners are rewarded with newly minted cryptocurrency.
With tokens things are different. In fact, unlike cryptocurrencies, tokens are not mined. Instead tokens are typically created through a variety of methods, including:
- Initial coin offerings (ICOs): An ICO is a fundraising event where a company or project sells tokens to the public in exchange for cryptocurrency or fiat currency.
- Initial exchange offerings (IEOs): An IEO is similar to an ICO, but it is conducted on a cryptocurrency exchange. This allows for greater liquidity and transparency.
- Staking: Staking is a process of locking up cryptocurrencies in order to secure a blockchain and validate transactions. In return for their stake, stakers are rewarded with newly minted tokens.
- Governance tokens: Governance tokens are given to holders of a cryptocurrency in order to give them voting power on the future of the project. These tokens are usually not mined or issued through ICOs or IEOs.
So, while cryptocurrencies are typically created through mining, tokens can be created through a variety of methods. The specific method used to create a token will depend on the project and its goals.
Cryptocurrencies vs Tokens
As explored previously, tokens show considerable versatility compared to cryptocurrencies. While cryptocurrencies primarily serve as a medium of exchange, tokens can cover different roles, which go far beyond payment functions. For example, tokens can find application in representing various assets, including real estate, works of art, or stocks. They can be used to represent ownership or investment in real-world assets or projects. They can provide voting rights, allowing owners to participate in the governance of the project. They can perform specific utility functions within a blockchain, such as guaranteeing access to the network, allowing participation in governance mechanisms, etc. In short, the functions covered by the tokens are the most disparate and their limit is only the imagination of the developers who create them. Let’s summarize the differences between cryptocurrencies and crypto tokens:
| Cryptocurrencies | Tokens | |
| Number | One per blockchain | One or many per blockchain |
| Blockchain | Have their own dedicated blockchains | Are built on pre-existing blockchains |
| Creation Process | Created through mining | Created through methods like ICOs, IEOs, staking, or governance tokens, but not through mining |
| Use Case | As a medium of exchange | Have diverse use cases, including representing assets, providing voting rights, or enabling specific utility functions within a blockchain |
| Security | Rely on the security of their own blockchain | Leverage the security of the underlying blockchain on which they are built |
| Regulatory status | Depends on countries and jurisdictions | Depends on their specific use cases and functions |