What is the difference between a blockchain, a cryptocurrency coin and a token?
You may hear the terms “blockchain”, “cryptocurrency”, “coin” and “token” tossed around the media a lot. But does anyone really know what they are talking about?
Ok, well obviously some people do, like Vitalik Buterin or Ivan On Tech. However, most people, especially in the news or Twitter Trolls, likely either have no idea or assume they are all synonymous.
In fact, I have a friend who studied economics/finance and development and he repeatedly tells me that he “believes blockchain will be successful, but not Bitcoin or cryptocurrencies.” I simply hang my head in frustration.
Allow me to clear it all up in this short article! Also, I’ve included a great summary video that inspired this post by Ivan on Tech at the bottom of this page.
- Cryptocurrency Coin (Protocol Layer)
- Token Smart Contract
- YouTube Summary from Ivan on Tech
The blockchain, as described elsewhere at Markshire Crypto, is a database of information grouped into time-stamped blocks. The blocks are organized in a linear chronological fashion.
The blockchain is the base-layer for all cryptocurrencies/coins and tokens, as you can see in the figure above. There are different blockchains in existence, not all created the same, but the basic underlying concept of what it is is the premise for this technology.
There are thousands and thousands of nodes, distributed worldwide, that create/mine and validate each block prior to its insertion into the blockchain.
The nodes that confirm the blocks are distributed and working independently and are described as decentralized.
Once a block is created and inserted into the blockchain it is deemed practically impossible to alter. And as time progresses, it is progressively more difficult to attempt altering older blocks. This leads to the immutability and therefore, security of the blockchain.
This decentralized, distributed, immutable database is known as the blockchain. It is an integral part of cryptocurrency technology and one of the more innovative of the Bitcoin revolution.
The blockchain is the basis for all of this cryptocurrency talk of coins and tokens etc. The blockchain is the base-layer of all cryptocurrency technology, as you can see from the image above. There is more than one blockchain though.
Not all blockchains are created the same or created equal.
Cryptocurrency Coin (Protocol Layer)
Coins refer to the actual cryptocurrency. These are what we have heard a lot of in the news. Protocols define coins. A specific coin is the native digital assets of a specific network.
- Bitcoin (BTC), the cryptocurrency, is a protocol.
- Ethereum (ETH), the cryptocurrency, is a protocol.
- EOS (EOS), the cryptocurrency, is a protocol.
- XRP (XRP), the cryptocurrency, is a protocol.
- Litecoin (LTC), the cryptocurrency, is a protocol.
- Cardano (ADA), the cryptocurrency, is a protocol.
A protocol is a method of communication, a set of rules programmed into the protocol. Bitcoin has a set of rules that the nodes use in order to continue to be a part of the Bitcoin network.
A protocol is essentially a way for computers to communicate/talk to each other.
The different protocols are built on top of the blockchain technology. That means that the blockchain technology is common to each cryptocurrency, but the way each cryptocurrency protocol works is what makes them different.
Hence you have a different blockchain for each cryptocurrency. There are multiple blockchains. Ethereum has its own blockchain, Bitcoin has its own blockchain, etc.
(BitTorrent and TCP/IP (the Internet) are also protocols.)
The way cryptocurrencies work, is that the information in a specific blockchain database (i.e. Ethereum) are passed around node to node based on the rules defined in the protocol. The movement of the ETH Coin (Ethereum) is based off these rules.
Again, the protocol defines the coin.
More detailed applications can be built on top of the cryptocurrency protocol layer.
And again, the protocol defines the coin.
Token Smart Contract
The Smart Contract defines the Token.
I’m going to slide in the same image from above as a reminder:
Moving on to cryptocurrency tokens… Let’s just recap briefly, then continue:
- Bitcoin, the cryptocurrency, is a protocol. BTC is the coin.
- Ethereum, the cryptocurrency, is a protocol. ETH is the coin.
- EOS, the cryptocurrency, is a protocol. EOS is the coin.
- XRP, the cryptocurrency, is a protocol. XRP is the coin.
- Litecoin, the cryptocurrency, is a protocol. LTC is the coin.
- Cardano, the cryptocurrency, is a protocol. ADA is the coin.
- TCP/IP, the Internet, is a protocol.
You get the idea. But wait… did you read that last one?
TCP/IP, or the Transmission Control Protocol/Internet Protocol is a communication protocol that is used to interconnect devices on a network, i.e. the Internet.
There are hundreds of applications for the internet: email, websites, Uber, cell phone communication, Twitter, SnapChat, Facebook, Netflix, YouTube, Google Maps, etc. These applications are specific, customized applications that live on top of the TCP/IP protocol. You could say that Facebook, Uber, and your email “live” on the Internet. Perhaps some of us millennials live on the Internet too… Hahaha
Anyway, these applications are analogous to tokens.
Tokens are defined as smart contracts running on top of a cryptocurrency protocol, such as Ethereum.
A smart contract can be defined, written out (written in code specific to the cryptocurrency protocol) and created as a token. This is where all of the details of Decentralized Autonomous Organizations come into play as well as various dApps (decentralized applications).
DAI (Maker) Token
Current tokens today include primarily smart contract stable coins. Maker DAI is a stable coin where one DAI = $1 USD. This is a decentralized smart contract that does not have a central authority to trust (unlike Tether [$USDT])
Basic Attention Token (BAT)
The Basic Attention Token is a token that is built on top of the Ethereum cryptocurrency protocol.
BAT is open source, transparent, decentralized and efficient. It creates a token of value that works online between users, publishers and advertisers.
Websites/platforms such as Facebook and YouTube have two sources of value, your data and your attention. Your attention is monetized by people creating engaging content (Youtube videos or viral Facebook posts) and the platform selling ad space to advertisers. The platform typically splits the advertising fee between itself and the publisher (i.e. YouTube channel).
BAT is changing that by creating a token of value that is used by advertisers to pay publishers and users directly. That being said, you will be paid to browse the internet as you normally do. Advertisers will pay you for your attention on their ad, minute amounts of course. Advertisers will also pay publishers for the content that they create. This is done on the Brave platform/browser, much like Chrome.
In this way you can choose to not see ads and then the advertiser does not pay out to you.
USDC, OmiseGo and Zilliqa
USDC is a USD backed stable coin (token really though) built on the Ethereum cryptocurrency network.
OmiseGo (OMG) is a decentralized bank, exchange and asset-backed blockchain gateway. It equates itself to a decentralized Ripple/XRP.
Zilliqa (ZIL) is a token built on the Ethereum cryptocurrency network that creates a high throughput (high transaction per second) blockchain (overlaid on the Ethereum base layer blockchain). Essentially a side chain.
Other token applications
All of the different applications for cryptocurrencies that you hear crypto maximalist proclaiming on Twitter, Reddit, other social media and crypto conferences lie in perfecting the Token smart contracts.
Insurance issuance, identifications, professional licenses, property deeds, vehicle ownership and insurance, business contracts, the issuance of stocks/bonds – all depend on the development of smart contract tokens.
Perhaps you’ve heard of Security Token Offerings – these are securities such as stocks, bonds, mutual funds, index funds etc that are built on top of a cryptocurrency and represent part-ownership of publicly traded companies.
Security Tokens – security meaning stock/bond/financial product, and token meaning smart contract to self execute and settle rapidly online.
One reason to put securities on cryptocurrency protocols, such as Ethereum, into security tokens is that you can simplify all of the administration and legal implications of stock ownership such as voting, the payout of dividends, ownership of the stocks themselves as well as trade settlement.
The same applies to hundreds, and thousands of other token applications, many of which we haven’t even thought of yet. We have barely scratched the surface of what will become the Token Economy.
YouTube Summary by Ivan on Tech
Markshire Crypto Conclusion on Blockchain vs. Cryptocurrency Coin vs. Token
The blockchain is the underlying technology common to all cryptocurrencies, although each cryptocurrency has its own separate blockchain. Blockchain is the underlying technology.
Cryptocurrency coins are specific protocols that specify the way the nodes communicate, essentially how data moves throughout the network and how new blocks are created/mined or validated by nodes. The protocol layer is the coin layer and refers to how coins are moved (data updated) on the blockchain. The protocol defines the coin.
Tokens are much more flexible and detailed and are written as smart contracts. Smart contracts define tokens. Tokens will be numerous and permeate all areas of our lives as it relates to value. Your college degree and high school diploma will be tokens. Your marriage certificate and (maybe) your divorce agreement will be smart contract tokens. We are witnessing the birth of the Token Economy.
Feel free to refresh your memory on cryptocurrency here.
Please feel free to drop a comment, question, or note for me. I love hearing from my readers