Cryptocurrency vs token — find the difference

Crypto “nest doll”

Cryptocurrency sphere is still not systemized in any national regulatory act, especially international ones. That is the reason why it is still somehow challenging to give an unambiguous definition to some of the terms belonging to this sphere. Same goes for tokens. Those, who think of them as synonyms of cryptocurrency, are not far from the truth. They clearly have a common ancestor.

When we talk about “crypto”, an image of bitcoin appears in people’s mind. It is right to some extent because bitcoin embodies the core idea of decentralized currency. But when newcomers want to understand the crypto industry better, they open a big and diverse world, where it may be somewhat tricky to navigate.

It provokes a natural desire to differentiate the concept of a token from the idea of cryptocurrency, define a coin, etc.  It’s just like crypto nest doll!

Tokens are sold out during pre-sale and ICO by issuers themselves, for cryptocurrency and sometimes fiat in return. Projects attract to invest funds in those cryptocurrencies which already exist and have some level of trust in the market — such as Bitcoin. Investors receive “tokens” in exchange for cryptocurrencies.

Token: from the 17th century up to now

The word “token” is at least 300 years old. It designates a local money substitute. They were minted in British colonies in the 17th century. Their significance is the same as of money but on a modest scale. Token’s analog is jetons in the monopoly or other game currency. It also includes casino chips and subway tokens. NYC Subway tokens are not accepted in London Underground. That’s what it's all about.

Tokens more frequently don’t have their blockchain and use already existing platforms, such as Ethereum or Waves. Nevertheless, depending on the project type, the borders between a token and cryptocurrency get blurred. A term “cryptocurrency token” is often used. A prime example of it —  Ethereum network with its cryptocurrency token “ether” (ETH).

The project launched ICO in 2014 with ETH token. However, ether is a unit of account and exchange (cryptocurrency) inside the Ethereum network, the purpose of which is the creation of smart contracts on blockchain base. Network functioning is supported by miners, who are paid with ethers for providing the system with processing power. Ethers can be exchanged for fiat money and used inside the system as a unit of exchange.

The main difference between cryptocurrency and tokens is in the connection of the latter to a certain ICO-project. This is a payment means in a particular ecosystem based on a fundamental cryptocurrency.

Cryptocurrency can exist without tokens, but tokens can’t stand on their own.

This is because tokens are based on a specific blockchain, while cryptocurrency is its constituent part. They are built on a ready platform. Moreover, a failure in the mother blockchain will strongly affect the tokens turnover in the network and probably will undermine tokens functionality and work of the project itself. Token failure will not affect the blockchain.

Therefore, tokens functions are bound to its issuer. In contrast to cryptocurrencies, tokens are not mined, they are issued by the company during the ICO or token generation event (TGE). Tokens value and investment attractiveness are determined by the actions of the organization that issued them.

Apart from tokens and cryptocurrencies, there are also coins. The difference between token and coin is that the second term has a broader concept. It combines both cryptocurrency and token. The word “coin” can be used in both contexts, but it’s less popular.

Tokens inequality or the story of one company

While some try to figure out what tokens are, Securities and Exchange Commission had already distinguished tokens according to their function and equated some of them to securities. The story began in summer 2017 when hackers stole investors money due to a bug in the code of new ICO-project named DAO. Then, in July 2017, SEC stepped in. It decided that DAO tokens had the features of securities and the company must have registered them officially.

Now startups that want to issue tokens are obliged to take Howey Test, which reveals whether tokens can be characterized as security papers or not.

The Howey Test determines if the token can be considered a security by the simultaneous presence of three independent parameters:

• There is a fact of investment.
• Funds are invested in a common enterprise.
• Profit is expected mainly as a result of the activities of the third party.

In the first case, it becomes a security token, in the second — utility token. In practice, it decreased the number of ICOs in the USA and made companies refuse to sell tokens to American citizens. All the more, Howey Test wording is somewhat vague and SEC can interpret it at its discretion. ICO organizers prefer to be safe than sorry.

Tokens are be divided into several groups:

• Equity tokens — constitute an equivalent of equity which gives its holder a possibility to have a profit share;
• Utility tokens — give a particular value or possibility within a platform. E.g. - decentralized computer Golem;
• Asset-backed tokens — tokens that are backed with real goods, for example, gold.

Tokens: field of use

Every startup describes the necessity of blockchain and project tokenization in the White paper. Therefore, investors face a dilemma, whether to use tokens as it’s intended or buy them only for resale. There are as many ways of tokens usage as there are projects. They offer to pay tokens for educational courses, medical consultations, private content or advertisement. The notion of “token velocity” has come out of this.

Token velocity, put simply, is a “mobility” of a certain project token in sales transactions. In other words, it determines the way of selling tokens for real money and their circulation among holders. There is a problem with token velocity. Projects seek to lower this parameter and encourage holders to keep tokens for a prolonged period and do nothing with them. It’s better to gain some profit while holding the tokens or long-term investing, rather than to speculate.

As we can see, a token, a coin and cryptocurrency differ, but rather slightly. In future, the terminology will surely be corrected, and we will have a standard dictionary, that will avoid misunderstandings and will be clear to everyone in the cryptocurrency community.