The Difference Between a Cryptocurrency and a Token
The two most commonly used cryptocurrency terms are coins and tokens. These are similar in function, representing value and processing payments. Coins are often accepted in some marketplaces, but not all. Tokens are the preferred currency of many businesses and governments, as they allow developers to create a new currency without building their own blockchain. But, what’s the difference between a cryptocurrency and a lyfe aid token?
Coins are decentralized
There is a widespread misconception that blockchains and cryptocurrencies are by default decentralized. However, this belief is incorrect, and blockchain platforms can vary greatly in decentralization. Proof-of-work blockchains, for example, have different degrees of decentralization, based on their cumulative hash rate and number of entities. However, the most important factor to consider when evaluating the decentralization of a blockchain is the amount of data it contains.
While some cryptocurrencies are backed by governments or central banks, the majority of cryptocurrencies have no central authority to regulate their production and operation. The reason that most cryptocurrencies are decentralized is that they have no physical form. As such, they are considered programmable assets. They allow the creation of smart contracts and are used to establish ownership of assets outside the blockchain network. Tokens are also used as a form of currency, allowing users to purchase them from brokers and store them in encrypted wallets.
Tokens rely on another cryptocurrency’s blockchain
Tokens are programmable assets built on another cryptocurrency’s blockchain. They allow users to execute unique smart contracts and establish ownership of assets outside the blockchain. Tokens are mostly EIP-20 tokens. Tokens work on a similar system to cryptocurrency, as they represent a fungible asset that can be held, traded, or staked in an account for interest. The main difference between a token and a cryptocurrency is their blockchain reliance.
While cryptocurrencies do have a blockchain, tokens rely on the Ethereum blockchain to run. The Ethereum blockchain powers the Ethereum token, and many others. They have different functions, but all rely on smart contracts to manage their transactions. Because tokens do not have their own blockchains, they are a useful way to implement smart contracts. They can also be used as payment instruments, like a store of value, or in exchange for services or goods.
Governance tokens give holders voting rights
In addition to bringing value to their holders, governance tokens also help DeFi projects become truly decentralized. This type of token aims to protect the community’s and investors’ interest in the network, and has already begun to democratize popular crypto networks such as Terra and Curve. As decentralized networks continue to become more popular, they will likely become more complex and involve more ownership, with governance tokens serving as an essential primitive for those networks.
By using governance tokens, a community can grow, with users being encouraged to become more active and contribute to the project. As one token is equivalent to one vote, token holders are encouraged to help improve the project. Holders can initiate proposals and vote on them, with each vote being publicly broadcast to the entire community. As a result, the likelihood of a cynic voting against the interests of one’s own interests is greatly reduced.
Non-fungible Tokens (NFTs) allow developers to create a cryptocurrency without building a blockchain
NFTs allow developers to create a cryptocurrency without having to build a blockchain. A prime example of a non-fungible token is NBA Top Shot, a partnership between Dapper Labs and the National Basketball Association. This project digitizes NBA content and sells highlights to consumers. These clips feature different angles and digital artwork, making them instantly recognizable as counterfeits.
NFTs are an evolution of cryptocurrencies. While cryptocurrencies use blockchains to record their existence, NFTs are not decentralized. They can be bought and sold just like cryptocurrency, but they do not have physical assets. They may not be worth the same when traded, but they are still valuable. The blockchain is also a tamper-resistant public database.