Is a cryptocurrency a token?
Is an altcoin a cryptocurrency?
Can a cryptocurrency be an altcoin and a token?
Crypto provides us with numerous terms that sometimes sound like marketing.
For example, in another age, you would never associate with someone who was trustless. But in crypto, trustless is considered a benefit of a decentralized peer-to-peer payment system.
Early in crypto’s development, there was Bitcoin.
Then there was Bitcoin and everything else.
Then came the ICO’s of 2017.
Followed by the regulators.
The crypto market became almost hierarchical, with Bitcoin at the top, then altcoins followed by tokens.
But there wasn’t just one altcoin or token. These areas expanded with definitions for various crypto use cases.
When you look at CoinMarketCap, you will see that in total, there are now over 10,000 crypto projects.
There are cryptocurrencies, smart contract platforms, stablecoins, governance tokens, altcoins and token projects.
And the vision for those 10,000 plus projects began with Bitcoin.
Bitcoin’s relationship with crypto
Everything in crypto is defined by its relationship with Bitcoin or some aspect of Bitcoin.
Each successive project contributed learning on top of Bitcoin’s vision. This led to a growing ecosystem of value discovery.
Bitcoin created that vision through its comprehensive software suite.
There is a peer-to-peer payment system.
There is a decentralized ledger, called a blockchain, to track every asset produced by the software.
There is a computational mechanism to clear transactions. That mechanism maintains the integrity of all the ledgers anywhere in the world.
The mechanism solves cryptographic difficulty numbers. This is called a proof of work consensus.
That mechanism is secured by a series of nodes called miners who allocate computer power and energy.
And miners are incentivized to compete to secure the network through rewards.
Rewards for winning block creators are in the form of tokens called Bitcoin and transaction fees.
Bitcoin has a limited number of tokens for issuance based on a predefined schedule.
Everything in crypto in whole or in part derives from this foundation.
Altcoins are anything other than Bitcoin
The Bitcoin maximalists believe there is Bitcoin and nothing else.
For part of the crypto movement, there is Bitcoin and alternatives to Bitcoin.
That is where the term altcoin came from. So based on this definition, every cryptocurrency that isn’t Bitcoin is an altcoin.
This includes Bitcoin Cash and its hard fork, Bitcoin SV.
A cryptocurrency is defined as a payment system where the token is native to and a reward for that specific blockchain.
So Ether is unique to the Ethereum blockchain.
XRP is unique to the XRP blockchain.
DASH is for DASH’s unique blockchain, while LTC is on its native Litecoin blockchain.
Dogecoin, which calls itself like Bitcoin, is an Altcoin with a token called DOGE. DOGE acts as the reward and payment asset unique to Dogecoin’s blockchain.
All of these are considered cryptocurrencies and altcoins. All of these crypto coins are also tokens.
While cryptocurrencies and altcoins are technically tokens, crypto also has a unique token ecosystem.
Tokens can be fungible, non-fungible, governance, security and utility
Tokens come in a variety of forms. They are sometimes defined by what they do, like governance tokens. Security tokens allow for the securitization of assets.
Utility tokens, on the other hand, seem to have an evolving definition.
Governance, security and utility tokens are typically associated with products built on an existing blockchain. A good example of this is Ethereum.
Ethereum has its own token called Ether (ETH) which is widely referred to as a cryptocurrency. But Ethereum is a smart contract platform where Ether is both a reward and a consumable in the form of gas.
But all the DeFi products built on Ethereum have tokens.
The tokens built on Ethereum are based on various token standards. The most common standards are ERC-20 (fungible tokens) and ERC-721 (non-fungible tokens).
Tokens on Ethereum can be governance, security or utility. They can also be NFTs and asset-backed tokens. The asset-backed tokens are associated with various ERC-20 Stablecoins like USDC.
In addition to Ethereum, there are several other platforms based around smart contracts.
These blockchain platforms are designed to emulate the best elements of Ethereum while improving on its weaknesses. There are currently over 80 smart contract platforms.
Each of these platforms has its own token. These tokens are typically used for payments and governance.
Amongst the most prominent alternative smart contract platforms are EOS, Cardano and Polkadot.
DeFi projects like those developed on Ethereum have opened up a whole new world for governance tokens.
Governance tokens give shareholder rights without ownership
Governance tokens have become a hot commodity recently. These are increasingly common in DeFi and associated with the proof of stake consensus.
Governance tokens give holders the right to vote on and guide the direction of a project.
In a sense, governance tokens are a sort of shareholder right without being a shareholder. They are very much in keeping with the original vision of Decentralized Autonomous Organizations (DAO).
DAO’s are designed to be left to a community to run and develop over time. The founders build it and set it free.
The use of governance tokens has expanded to Decentralized Exchanges on DeFi. These were airdropped as loyalty rewards to users and supporters of various protocols.
Examples of DEX’s with governance tokens are:
And that’s just a small sample of the governance-specific tokens. Various other tokens have a hybrid role with any combination of governance, voting and work.
Security tokens are regulatory minefields
Security tokens have been slow to develop. The chief issue here is working with regulators.
Regulators generally have been cautious about being heavy-handed with crypto. However, when it comes to securities regulation, they tend to be more focused and aggressive.
In many parts of the world, rulings by regulators around what cryptocurrencies are were an important event. In most instances, they are considered commodities for regulation.
Security tokens represent another avenue for crypto and DeFi to expand and explore.
Unlike governance tokens, security tokens represent a share in a business.
There are a handful of exchanges around the world that operate as security token exchanges. Exchanges include tZERO, OpenFinance Network and MERJ.
The DeFi DEX, Uniswap, also has some security token listings.
And one of the oldest traditional stock exchanges, the London Stock Exchange, is pursuing security token offerings.
Utility tokens have an evolving definition
When crypto was still in its infancy, Initial Coin Offerings (ICOs) became a hot commodity. The very first ICO was Mastercoin in 2013. ICOs grew exponentially in the years that followed as a viable way to raise money for open source crypto software projects.
The proceeds of the ICOs were often referred to as utility tokens. This may have been in part to avoid regulatory scrutiny.
The term utility token is difficult to define clearly. In some places, a utility token is described as access to a service but not ownership in a project. Sometimes utility tokens are described as a form of decentralized loyalty points. They give you access to a service.
The one clear example of a project with a utility token is Filecoin. Here the tokens give you access to a decentralized storage system.
Other utility tokens call themselves utility tokens but describe their role as governance tokens.
So the term utility token is in flux. It currently appears to be more a workaround to regulatory matters than a clear standard definition.
Tokens are rewards in crypto’s value discovery ecosystem
At its core, crypto is a value discovery ecosystem.
Value discovery takes place in numerous different ways. These include smart contract platforms, cryptocurrencies, altcoins and all the tokens involved in every project.
Tokens have been used effectively to raise crucial funds for open source, speculative software projects in crypto.
They have been used as rewards to loyal users of DEX’s to give them agency over the platform they supported.
They represent a way for miners to be incentivized for securing decentralized networks.
And they are being used to digitize unique assets like NFT’s. They are also being used to advance capital formation in the form of programmable securities.
It’s amazing to think that all of this has blossomed from a humble digital white paper in 2009.
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