Cryptocurrency is a decentralized financial instrument running on the blockchain. As technology develops, new forms of digital assets emerge that have similar characteristics, but also have their own characteristics.
Bitcoin, altcoins, tokens and blockchain: what are they?
What is blockchain and bitcoin
Blockchain is an electronic database in which information can be entered, but cannot be deleted or changed.
Bitcoin is the first cryptocurrency to be created as a decentralized asset with its own blockchain. This blockchain functions as a public ledger that automatically verifies and stores information about all transactions. This system exists only in the online space and is encrypted using cryptographic code.
After the creation of the first digital currency, the development of an entire industry began with many new assets, technologies and projects of various directions.
What are altcoins
Following Bitcoin, other digital currency projects based on distributed ledger technology emerged. In the first few years, all cryptocurrencies had their own blockchain. They differed from Bitcoin in their characteristics - for example, higher transaction speeds and anonymity levels, a modified mining algorithm, etc. Such assets began to be called alternative coins, or altcoins.
Based on the method of development, they can be classified into three categories:
cryptocurrencies based on Bitcoin code, edited to implement new functions. These are, for example, litecoin, dogecoin and others;
cryptocurrencies created by modifying the protocol of existing assets. As a result, the blockchain is divided into two chains and a new coin appears - a hard fork. These are, for example, bitcoin cash, bitcoin gold;
cryptocurrencies developed from scratch without using Bitcoin code - ethereum, BNB, polkadot and others.
An important difference between altcoins is the presence of their own blockchain. It, by analogy with Bitcoin, serves as a decentralized transaction registry.
What are tokens in cryptocurrency
The first tokens in the modern sense appeared only in 2015 with the launch of the Ethereum platform. It implemented functions for creating digital assets without a new blockchain. They operate within the main network, can be freely transferred between users and traded on exchanges.
Creating tokens is easier than coins with their own blockchain. To do this, you do not need to write a protocol from scratch or even edit it. It is enough to follow the instructions provided by a specific platform - Ethereum, BNB Chain, Cardano, etc. Sometimes this does not even require programming skills.
More about terminology
The concepts of “cryptocurrency”, “altcoin” and “token” often overlap. In one context they may be synonymous, but in another they may have different meanings.
For example, the word "cryptocurrency" could refer to:
only to Bitcoin;
to Bitcoin and altcoins;
to all digital assets, including altcoins and tokens.
The word “altcoin” can be used to refer to:
all digital assets except Bitcoin, including tokens;
only coins with their own blockchain.
The word “token” can also refer to different types of digital assets:
only to assets without a blockchain;
to coins with their own blockchain - for example, ETH token on the Ethereum platform, BNB on BNB Chain, etc.
But, if we approach the definition strictly and take into account the technical characteristics, the word “tokens” should be understood only as assets without a separate blockchain, while cryptocurrencies and altcoins are coins with their own blockchain.
Similarities and differences between coins and tokens
Coins and tokens have similar technical characteristics. And those and others:
use blockchain as a transaction ledger;
have cryptographic security;
have comparable speed and convenience of transactions;
can be used as a means of payment;
divided into fractional parts;
have limited emissions.
But tokens also have differences:
do not have their own blockchain;
almost never mined (they are launched immediately with 100% emission);
are created to solve specific problems in a project.
Separately, it is worth considering the issue of decentralization of management. Cryptocurrency with its own blockchain exists and develops according to a pre-established algorithm. It includes the method of emission, block generation, transaction speed and other parameters. All processes are controlled by miners, validators or another type of community. There is no centralized body capable of changing something at will.
This is not always the case with tokens. They are created for use in a specific project, and their characteristics or functions may change over time. This process can happen in different ways:
The creators of the project, at their own discretion, edit the code and change the functionality.
All decisions are made by the user community through discussion and voting.
The token may not have the ability to be edited in any way - everything happens according to pre-established rules.
In the third option, there is no possibility of improving and developing the system. The second option is considered optimal, since it involves decentralized management.
Some projects go through all three stages. For example, at first the creators take over the development and decision-making, then they transfer control to the community, which some time later may close the opportunity to make any changes.
In any case, miners do not control the processes within the project: this is an important difference between the decentralized management of coins and tokens.
Types of tokens
Initially, users did not classify tokens into different categories: each asset had its own characteristics and could perform certain functions. However, over time, government regulators in different countries began to pass laws to control the cryptocurrency market and the processes that occur on it. Thus, the US Securities and Exchange Commission (SEC) stated that some digital assets should be considered securities, which means that appropriate legislation should be applied to them.
As a result, users began to have questions about how to work with cryptocurrency without breaking the law. To better understand what restrictions certain assets are subject to, the concepts of security tokens and utility tokens were introduced. They differ also in legal aspects.
Security tokens
The phrase security token is translated as “token - security”. It is created for crowdfunding, raising funds for the development of the project. If the outcome is successful, investors will be able to receive a portion of the profits.
Security tokens can also provide holders with additional rights:
to own assets or shares in a company;
receiving dividends;
participation in voting;
payment of debts.
The first security tokens were created with similar characteristics when the American regulator began to require issuers to comply with the law on the issuance of securities.
A little later, tokenized assets appeared, which are also backed by real value - for example, gold, shares, real estate. They can be considered a type of security token, but they are created not for participation in crowdfunding, but for the “digitalization” of existing investment instruments.
Such assets represent an innovative approach to investing - with a high level of security and liquidity, as well as greater accessibility to investors. In the future, experts expect an increase in the popularity of such tokens and their use in various fields.
Utility tokens
“Utility tokens,” or utility tokens, are not considered securities. They are used as a means to obtain services or functions within a project. For example, the Binance exchange offers holders of BNB, the utility token of the BNB Chain ecosystem, discounts on fees and access to additional services.
Utility tokens have significantly more uses compared to security:
access to services and services;
making payments;
conducting exchanges;
payment of commissions;
payment for subscriptions;
community management and development;
rewards for various activities in the project;
integration with external systems and technologies;
creation of decentralized applications;
creation of various business models;
exchange for virtual and physical objects;
participation in voting;
participation in staking;
participation in bonus programs;
security support and risk management;
confirmation of ownership and much more.
Exchange can be carried out:
between users - for example, in applications or games for transferring virtual things;
from users to administration - there are decentralized services that can be accessed using digital assets;
from developers to users - tokens can be awarded for fulfilling certain conditions.
There is no provision for making a profit from owning utility tokens, except in cases where the owner transfers them for temporary use.
Common features of security and utility tokens
In market conditions, these two types of assets may have similar or even identical properties:
Utility tokens are traded on exchanges. This means that their price fluctuates constantly, and they can bring both profit and loss to their holders.
Security tokens can have useful features. In some projects, they are used as a means of payment, providing access to company services or other opportunities.
Currently, security tokens are less popular than utilities; they have not yet received widespread recognition from large investors and businesses. This is due to the fact that their release requires going through complex legal procedures.
Other types of tokens
In addition to security and utility tokens, there are other types of digital assets without their own blockchain.
Stablecoins
This type of cryptocurrency is primarily known for the fact that its rate is tied to a stable asset, such as fiat currency, a precious metal, or a security.
Another feature of stablecoins is revealed in the context of the classification of utility and security tokens. Stablecoins belong to neither the first nor the second category, but may have characteristics of different types of assets:
Like security tokens, tokenized assets allow you to receive income from dividends or other investment vehicles. In this case, they must comply with securities laws.
As utility tokens, most stablecoins do not generate income and are not subject to securities laws. They can also be used in decentralized services, such as staking and lending.
As a cryptocurrency, they can be used to pay for goods and services, as well as to conduct international transactions without the intermediation of traditional payment systems.
Thus, different stablecoins can belong to different types of assets - it all depends on their characteristics and the features of the project in which they are used.
NFT
The main feature of NFTs is that each of them is unique and exists in a single copy. Typically, such assets are used to tokenize unique digital objects, such as images, music tracks, videos, game items and others.
NFTs allow creatives and developers to create and sell digital assets just like physical items. In terms of functionality, they can be classified as utility tokens, since they provide the rights to use and access a digital asset.
But buying art and collectibles is sometimes considered a subset of traditional investing. If an NFT represents a piece of art, it can increase in value and generate profit for its owner. This is similar to security tokens, although in most jurisdictions NFTs are not yet subject to securities laws.