Feeling confused? Suffering from techno-terminology overload? Just when you are getting nice and comfy with hearing about cryptocurrency, suddenly people are talking about altcoins and tokens? Relax a moment or two and let’s take a look at cryptocurrency, altcoins, and tokens and see if we can shine a light on them.
The World of Cryptocurrency, Altcoins and Tokens
Time for Cryptocurrency Basics
Cryptocurrencies are like money. When I say, “money”, I’m talking about the stuff we keep in our wallets, purses, and pockets. Hard currency. In the crypto world, many like to call it “fiat”. Both crypto and money are used as a medium of exchange, a store of value, and a unit in someone’s account. Goods and services trade hands and payment is made to complete the transaction.
Cryptocurrencies are virtual money. They are digital. They exist in the world of the internet. The “crypto” part comes from the word cryptography. Cryptography means to put things into codes. The act of actually putting something into code is called encryption. So cryptocurrencies are digital or virtual money that is safe and secure because they have been encrypted. Since they have been encrypted, the transactions involving this digital money are likewise safe and secure thanks to encryption.
Bitcoin was First, Right?
Bitcoin was not the first cryptocurrency. Bitcoin was the first decentralized cryptocurrency. Decentralization means that there are no banks. None are needed. Everything is performed person to person otherwise known as P2P or peer to peer.
In the late 1980’s, a group of developers in the Netherlands attempted to create smart cards which would have money linked to them. This early attempt at electronic cash eventually led to digital currencies.
In the 90’s a company called Digicash was formed by American developer David Chaum when he started experimenting with digital cash. His vision was a token system. Tokens could be transferred between individuals. This was possible because he used encryption which made the transactions secure. His ideas and efforts bear a close resemblance to the cryptocurrency system today.
The virtual currency Pandora’s Box was now open. Others followed over the years until Bitcoin came along and changed everything by being decentralized and developing and using blockchain technology.
Are There Categories of Cryptocurrency?
Some might be surprised to find out that there are categories of crypto. Cryptocurrency units, as a whole, are referred to as either coins or tokens. Despite being called currency, they have differing functions. Not all of them are used as either money or as a medium of exchange.
Bitcoin, however, does actually meets all the characteristics we associate with money. It is used as a medium of exchange. It is also a store of value and a unit of an account. A number of other “cryptocurrencies” developed after Bitcoin are collectively called cryptocurrency even though they function differently.
Well, What Are The Categories?
These two categories are really sub-sets of cryptocurrency. I mentioned them earlier. The categories are Tokens and Altcoins. Altcoin stands for Alternative Cryptocurrency Coins.
Alternative Cryptocurrency Coins are coins that are not Bitcoin. They use Bitcoin’s open source protocol. They are everything that came after Bitcoin. The difference with Altcoins is that there have been changes made to Bitcoin’s code. With a change in the code, a brand new coin is made. The new coin has different features too depending on the changes to the code. Basically, these Altcoins are variations of Bitcoins.
The other type of Altcoins are not variations of Bitcoins. These have their own blockchain and, this is the major difference, their own protocol. Their protocol, which is not a derivation of Bitcoin’s open source protocol, supports their native currency. Ethereum and Ripple are two examples of this type of Altcoin.
Transactions of every Altcoin happen in their independent blockchain in their native currency. That is what all Altcoins have in common.
Tokens are different. They do not have their own blockchain. They usually exist or reside on top of another blockchain. Tokens are a representation. They can represent any number of assets. They can represent loyalty points. They can represent commodities. They can even represent other cryptocurrencies.
With tokens, there is no changing coding and no creating a new blockchain. Simply follow the standardized template of the blockchain you want the tokens to reside upon. Follow that template and you can make your own tokens thanks to smart contracts.
Thanks to smart contracts, no third party is needed to operate it because smart contracts are software that is self-executing.
So, What’s the Difference?
You have Bitcoin which is cryptocurrency. Bitcoins are the revolutionary cryptocurrency that set the current standard. Bitcoin is digital money that is decentralized. No banks mean no middleman you have to pay to conduct banking business.
Altcoins are a type of cryptocurrency also. Some are variations of Bitcoin. Others are their own type because they have their own protocol.
Tokens do not reside upon their own blockchain. They reside upon others and are extremely flexible in what asset or value they represent.