Differences between Tokens and Cryptocurrencies

What Is a Cryptocurrency

Cryptocurrency is a native asset of a blockchain. Each blockchain network has one and only one cryptocurrency that helps it to function. Bitcoin, Ethereum, Cardano, and Solana are cryptocurrencies as they refer to their native blockchains.

Blockchain network uses cryptocurrency to incentivize network users. Blockchains are decentralized networks where data is stored, and transactions perform on the computers of network users, so-called nodes, in contrast to centralized systems with centralized storage and control over transactions. These nodes verify transactions, add new blocks, and control the network.

Blockchains can function because nodes provide storage space, mine cryptocurrencies, or lock native assets on smart contracts. There are numerous types of actions helping blockchains to operate. These actions are conducted under specific rules known as a consensus mechanism. A consensus mechanism is an agreement between nodes on controlling the network.

Nodes' work is essential for the blockchain's operation. It needs time, storage space, electricity and other costs, so they get rewards for their activity in the blockchain's native cryptocurrency depending on the rules upon consensus mechanism.

Networks charge transaction fees known as gas fees from other users for transactions within the network to reward nodes. The fees are also paid in the blockchain's native currency.

Besides using for fees and rewards within native blockchain networks, cryptocurrencies work as a medium of exchange and store of value, replacing government currencies. Cryptocurrencies have a limited number of use cases compared to tokens.

What Is a Token

Tokens are assets issued on top of existing blockchains. Usually, tokens are digital currencies of decentralized finance (DeFi) platforms. While cryptocurrencies exist upon consensus mechanism and are used as incentives, tokens may have wide usage and utility and go along with smart contracts.

A smart contract is a programmed code ensuring honest transactions between blockchain users without middlemen engaged. Smart contracts specify the token's supply, issuance, distribution, functions and features. A poor smart contract makes the token and its holders vulnerable to hacker attacks and thefts. So DeFi projects should pass smart contract audits to save their users and platforms or dApps.

In contrast to cryptocurrencies mined by nodes, tokens are minted and distributed by the DeFi project's developers.

Tokens may also appear as a medium of exchange and store of value, but aside from that, they have more diverse options:

• utility: tokens give access to project functions and features;
• governance: token holders vote on vital decisions and influence the development direction;
• securities: like stocks and bonds tokens provide shares in companies;
• stablecoins: tokens backed by fiat currencies (usually USD) and have a 1:1 equivalent;
• NFTs: non-fungible tokens approving owning rights and widely used in arts and games.

Tokens are created according to the tokenization standards of hosting blockchain. Thus they can smoothly exist within the network, being transferred and stored in supporting wallets.

Cryptocurrencies vs Tokens: Similarities

For an end user, tokens and cryptocurrencies appear as the same digital assets despite their technical differences. However, they have a lot in common. Thus, tokens and cryptocurrencies exist on a blockchain and use blockchain technology. They resist the control of a small group of people or institutions because of decentralization. They may be used for transferring values and easily bought and sold on crypto exchanges.

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