The world of cryptocurrencies and blockchain continues to
expand from its humble beginnings to becoming buzzwords by the conclusion of
2017, to now, when more people and businesses understand the new technology, as
well as, its range of applications. One common point of confusion that has
arisen surrounds the frivolous nature in which some refer to the digital coins,
such as Bitcoin, and tokens as the same entity. Tokens and coins are, in fact,
very different aspects of blockchain technology and its ilk, offering different
applications on the blockchain and when making transactions.
What are digital coins?
Digital coins, or cryptocurrencies, often have a sole
function: to be used as a payment method. The original cryptocurrency, Bitcoin,
was introduced with the sole purpose of eradicating fiat currencies with its
trusted and immutable decentralised public ledger, known as the blockchain. The
focus for Bitcoin and most other coins is on the speed, safety, and
affordability of making payments while it primarily denotes value to be used to
exchange for services and goods.
Each coin is an asset native to its blockchain, with their
function and operation being solely on their specific blockchain. They are
first introduced from the blockchain following an initial coin offering (ICO),
which allows people to pay money to acquire the digital coins for use within
the blockchain. Exchanges and trading platforms, such as Coinbase and Kraken,
have emerged to cater to the fiat money and cryptocurrency exchange of digital
coins for users who aim to make a profit on the rise in the value of coins. The
most famous incident involving the price of a digital coin on the stock
exchange was Bitcoin in December 2017, when its price soared to $19,343.04.
The use of coins is primarily as a payment method for
services or goods on a blockchain. While some coins, such as Ethereum’s Ether,
have other functions as well, the primary function of the coin is to denote
value for a payment, with Bitcoin being the prime and most recognisable example.
What are digital tokens and how do they work?
The reason why coins and tokens are often mistaken as the
same digital item is not only because the two terms are somewhat
interchangeable in the physical world, but also because they both hold value
within their specific blockchain. Tokens are created within decentralised apps
(dApps) that are hosted by a blockchain that functions on smart contracts, such
as Ethereum. By funding a smart contract with the blockchain’s native coin, the
user receives an allocated amount of tokens which, in turn, allows the user to
interact with the dApp. The dApp which received coin in exchange for its tokens
will then further develop its service with the new capital. Tokens often
represent some form of value for use within or concerning the dApp which
released them and are used as a medium of exchange.
Anyone who operates a dApp can create and issue customised
tokens for use within their dApp. To create these tokens, the developer must
pay a fee in the form of the blockchain’s native coin, such as Ether on the
Ethereum blockchain, to pay the miners who validate the tokens. Coins are also
required to exchange the tokens from peer-to-peer. Those who have created a
token model for their dApp will often set specific methods in which users can
earn the tokens. If constructed well, users will perform these actions to gain
the desired tokens to use on their favourite goods and services. If a token
ecosystem is well-crafted, it can add another incentive for users to interact
with the dApp’s offering, giving it more value than just monetary.
The benefit of developers employing the token model on an
existing blockchain, thus being required to pay the coin fees for the creating
and distribution of coins, is that the blockchain provides structure, upkeep,
validations, and security through its vast network of computers.
There are four different forms of token according to the
definitions of Swiss financial regulators FINMA, all of which have the goal of
gaining capital from users spending coin on using the tokens for the dApp at
hand. The four definitions of token are as follows:
Tokens: The utility tokens are used to gain access to a certain part of a dApp,
such as a particular service or product offering. Due to their limited supply,
utility tokens are often expected to increase in value.
Tokens: Similar to how coins function, but more specific in their usage,
payment tokens have the sole use of payment for services or goods.
Tokens: These are the tokens issued by the initial token sale (ITS), which
people will invest their money in with the aim of making a profit.
Tokens: This is an uncommon form of token at this time, but equity tokens are
those that represent equity or stock in a company.
Tokens in practice
Ethereum is a grand example of how tokens work within a
blockchain. The Ethereum network operates on the issuing and completion of
smart contracts with its coin, Ether, working as the ‘fuel’ and payment method
of the smart contracts. Within the network, there are many dApps which function
token-providing smart contracts which require Ether to fuel.
Many decentralised apps deploy tokenised models, and Golem
is one of the most popular examples. Golem grants people remote access to its supercomputers
for work in many different computing fields such as cryptography. To keep the
Golem network working at optimum levels, it draws computing power from its
users’ computers, servicing the processing needs. To incentivise this, Golem
rewards tokens to those who allow the Golem software on their computer to aid
the network, which users can then use on Golem services.
The Musicoin dApp issues tokens that can be purchased in
exchange for coins which then allow the user to activate certain features of
the Musicoin platform. With a token, users can stream and listen to music
hosted by Musicoin, working as a digital version of the old jukeboxes which
required customers to insert a specific token before being able to select the
song that they wanted to be played.
Tokens are also being used as vessels that represent
products and items of the physical world. While Ripple is a recognised coin
service, providing fast and low commission transactions as well as its own
coin, it utilises tokens within its network as representatives of monetary
values. The Ripple token starts as a form of joker card which can represent
almost any value of a transfer of cryptocurrency or fiat currency across the
network. WePower works similarly, with users able to purchase and sell tokens
which denote values of electricity on the WePower blockchain.
Coins versus Tokens
To state a rough coverall distinction between coins and
tokens; the primary purpose of a coin is to make a payment or monetary exchange
while tokens are put to use by consumers looking to activate features of a
decentralised app within a blockchain that has a native coin and features smart
contracts. However, coins can be multifunctional, such as Ethereum’s Ether coin
which acts as fuel for smart contracts, and tokens take more forms than just
granting users access to products and services offered by a dApp. Some tokens
work as assets or equities, while others are also used for payments. The
primary difference is that tokens tend to be dApp-specific, whereas coins are
mostly used as money.