What sets one cryptocurrency apart from another?
With so many different cryptocurrencies out there (and more being created each day), it can be difficult to keep track of them all, let alone understand how each one differs from one another. There are a few different ways one can break down the differences between cryptocurrencies. In this article, we’ll be exploring the following differentiating factors: Its type – whether it’s a coin or a token, the blockchain on which it operates, and its functionality.
Coin or Token?
Though they are often used interchangeably in casual conversation, there are a few notable differences between what’s considered a coin or a token in crypto. A coin is any digital currency that’s native to its own blockchain. The most well-known coin out there today is Bitcoin, the first cryptocurrency. It’s a store of value that uses blockchain technology to record every transaction in a decentralized fashion. Another example is the first memecoin Dogecoin, which began as tongue-in-cheek joke in 2013.
There are also stablecoins such as Tether (USDT) and USD Coin (USDC) which are backed by US fiat currency and pegged to the value of the dollar. These digital currencies a great option for anyone looking to enter the crypto space without having to worry about price volatility.
Tokens, on the other hand, are digital assets that have been built on top of an existing coin’s blockchain. They utilize each chain’s existing smart contracts (lines of code that execute directions) to facilitate payments, trades, or other utility-focused interactions with Decentralized Apps (DApps), such as a Decentralized Exchange (DEX). The popular Shiba Inu Token (SHIB) is one such example. It’s an Ethereum-based token that was built atop its blockchain, so it can be further classified as an ERC-20 token (more on this in a moment).
Each blockchain works a bit differently with different native tokens and smart contract protocols for each. Because of this, there are a few types of tokens out there, each operating on their own blockchain. Arguably the most popular type is the ERC-20 token, which is used for all smart contracts on the Ethereum network and provides the rules that all ETH-based tokens need to follow. Another well-known token is the BEP-20 classification, which runs off the Binance Smart Chain (BSC) network. Just as Ether (ETH) is native to Ethereum, Binance Coin (BNB) is what powers BSC. A third token classification is HRC-20, which is used in Huobi Eco Chain (HECO), another unique blockchain created by a large cryptocurrency exchange. It’s important to note these differences, as each blockchain (and their respective token type) operate independently of one another and are not cross-compatible. If, however, you do wish to send tokens or funds from one blockchain to another, you can use a specialized transfer platform called a bridge.
Functionality
Different cryptocurrencies come with different functionalities. For example, while Bitcoin’s primary use case was originally for making payments, it’s evolved to become more of a digital asset to be held onto. In addition to their payment functionality, other coins such as Ethereum (ETH), Binance Coin (BNB), and Solana (SOL) are required for network fees on every blockchain transaction (called a gas fee). Tokens are usually more utility-focused than coins and can be made for a wide variety of uses. SHIB for example, can be staked (locked up for a certain period of time) and rewards holders for doing so with additional accumulating tokens.
Other tokens such as Decentraland’s MANA in-game currency can be used in their blockchain-powered metaverse to purchase digital items, which are themselves Non-Fungible Tokens (NFTs). These can be anything from a bookshelf to a t-shirt, to a plot of virtual land. Certain utility tokens such as Filecoin’s FIL are used for payment and rewards for data storage and retrieval protocols. There are even governance tokens which allow for blockchain-based voting in a community, giving everyone the chance to have their voice heard.
Every cryptocurrency is unique in its own way. We hope that this breakdown has helped you gain a better understanding of how to differentiate each kind so that you can be confident in identifying their many attributes. As always, remember to do your due diligence, and good luck!
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