Cryptocurrencies and digital tokens operate using blockchain technology. Transactions in cryptocurrencies are recorded in a distributed electronic ledger that is validated by computers all around the world. You can buy and sell cryptocurrencies and tokens online using a cryptocurrency exchange and store them in cryptocurrency wallets. Despite the similarities, currencies and tokens are fundamentally different.
What is the difference between cryptocurrencies and tokens?
Cryptocurrencies and digital tokens may seem like similar terms, but in theory, they are not the same thing. Cryptocurrencies rely on an existing blockchain to operate, while tokens are a part of each blockchain.
Here’s more about the differences between them:
Cryptocurrency
Created as part of a blockchain program. Currencies are essential for operating the blockchain network.
Digital Token
Created using smart contracts, which are a type of software that uses an already existing blockchain.
Cryptocurrencies and tokens often work in the same way, and some cryptocurrency users may not realize they are using one or the other. However, this fundamental difference affects transaction costs and the technical operations of the currency. Read on for a deeper look at tokens and cryptocurrencies, so you know the key differences.
How do cryptocurrencies and digital tokens work?
Cryptocurrencies operate on their own independent networks. To launch a new cryptocurrency network, developers must create a new blockchain and build out the infrastructure to make it work.
As long as this blockchain remains online, the associated cryptocurrency will continue to exist as well. Although the value of the currency may be highly speculative, the currency itself needs to exist indefinitely, as long as there are users and miners or validators maintaining the system.
Digital tokens rely on another network to function as a platform. This means that digital tokens cannot exist without the underlying infrastructure provided by the blockchain and its original cryptocurrency.
Think of it this way. You pay for a new home with cash or a mortgage, but the deed is what gives you ownership of the house. The deed is a contract that would not exist without the underlying monetary system. So in this case, cash would be the currency, and the deed would be the token.
Uses of cryptocurrencies and digital tokens
Cryptocurrencies like Bitcoin and Ethereum have been used for exchange purposes or investment as assets. Ethereum’s blockchain allowed for smart contracts, paving the way for tokenization.
Tokens are useful for various purposes, including stablecoins, gaming, initial coin offerings (ICOs), and creating new tradable assets. Stablecoins are digital tokens that always track the value of a specific fiat currency, like the US dollar.
One of the most well-known forms of tokens is non-fungible tokens (NFTs), which are unique digital assets that can range from an artwork piece to a sports memorabilia or even a tweet.
Paying for cryptocurrency and digital token transactions
Cryptocurrencies are used to pay for transactions in currencies and tokens, including non-fungible tokens (NFTs).
If you want to send cryptocurrency to someone from your wallet or make a transfer between wallets or accounts that you own, you will likely have to pay a network fee, sometimes referred to as gas.
You pay the network fee using the base currency of the network. For example, if you want to send Ether (the name for Ethereum’s currency) to a friend, you will need to allocate some Ether to pay for the transfer. Gas fees are usually calculated as a small part of Ether called gwei.
When using digital tokens, you need to hold both the token and the base currency of the network to conduct transactions outside of a centralized exchange. For example, if you want to send a Shiba Inu token to a hardware wallet, you will need to use Ether, which is the currency, to pay for the fees.
Examples
On Cryptocurrencies and Popular Digital Tokens
In April 2022, there were over 1050 cryptocurrencies and 9000 digital tokens listed on CoinMarketCap. This makes tokens more abundant than currencies. However, some of the smaller coins and tokens carry little value, if any.
Popular cryptocurrencies include Bitcoin, Ethereum, and Binance Coin. Tether, Shiba Inu, Decentraland, and Axie Infinity were among the most significant tokens.
A Choice That Brings Together Cryptocurrencies and Digital Tokens
If you are interested in cryptocurrencies, you may wonder whether digital tokens or coins make more sense for your investments or trading strategy. There is no rule that requires you to use or own cryptocurrencies at all. If you decide to invest, you can easily purchase a mix of coins and tokens.
Just like in the stock market, it may be wise to diversify your cryptocurrency investments beyond just one or two coins.
Conclusion
Cryptocurrencies and digital tokens play a vital role in the digital currency ecosystem. Coins and blockchain provide the underlying infrastructure that allows digital tokens and other smart contracts to exist and operate.
In some ways, coins may be viewed as a safer and more stable investment option, as they are essential for the functioning of the blockchain. Tokens can come and go without significantly impacting other digital currencies. However, either a coin or a token can be a good choice for your trading and investment goals.
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Source: https://www.thebalancemoney.com/cryptocurrency-tokens-vs-coins-what-s-the-difference-5270420
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