Hi all,

Talking about blockchains means that you have to talk about cryptocurrencies at some point. That's a bit complicated because the crypto scene doesn't exactly have a great reputation.

Having said that, there are good reasons to be interested in crypto – and these go beyond trying to get rich quick. Some background knowledge is a useful starting point.

So what’s up?

This is our first of two articles to explain the differences between cryptocurrencies and crypto tokens. They may be related but are not quite the same – and tokens in particular open up a lot of opportunities. We'll explain:

• What is a cryptocurreny?

• What's a crypto token?

• How does a token differ from a cryptocurrency?

In our next post, we'll look at some of the actual use cases for tokens.

Let’s get started! 🤓

From the outside, the cryptocurency market looks very complicated. Maybe you've heard about Bitcoin or even Ethereum, but what about all these other blockchains, currencies and tokens?

We'll explain the details below but here's a simple guide to two basic terms:

• Cryptocurrencies belong to a specific blockchain, e.g. Bitcoin or Ethereum.

• Tokens are created on a particular blockchain and are usually linked to specific use cases.

Ethereum is a good example. It's a blockchain which supports a cryptocurrency (ETH). That's similar to a country using its own currency.

On the Ethereum blockchain, it's also possible to run applications which can issue their own tokens. Token owners may collect revenues from an application or obtain voting powers to decide on its future direction. That's similar to shareholders in a company collecting dividends and voting during the annual general meeting.

(Note: The shareholder analogy is far from perfect because it leads to questions about the regulation of crypto tokens. That's a topic for another day though, we'll concentrate on the basics first.)

What is a cryptocurrency?

Cryptocurrencies have gained a lot of attention in just a few years. Their promise: revolutionise the way people save and send money. Whether the fascinating realm of cryptocurrencies will really deliver on this rather ambitious promise remains an open question. It is obvious, however, that more and more people around the globe believe that crypto is more than just a hype.

Cryptocurrencies are digital or virtual currencies which employ cryptography for security. Unlike traditional – or "fiat" – currencies, they are decentralised, meaning that they are not controlled by governments or central banks. Blockchains are necessary as the underlying technology. They ensure transparent, secure and immutable transactions.

Bitcoin, introduced in 2009, was the first cryptocurrency. Its peer-to-peer network allows direct transactions between users without an intermediary like a bank or a service provider like Paypal.

After Bitcoin paved the way for cryptocurrencies, Ethereum introduced another dimension when it was launched in 2015. The Ethereum blockchain is a decentralised platform. Imagine a data centre which is not located in one physical location but on many servers around the world.

This structure enabled developers to create decentralised applications (we'll explain this concept in more depth in another post). Ethereum's native currency is Ether (ETH). It fuels the network and facilitates transactions within and between the different applications.

One of the key features of cryptocurrencies in general is the decentralised nature which we've already mentioned above. Transactions are verified by a network of participants rather than a single authority.

Moreover, transactions on a blockchain are pseudonymous. Users are identified by a wallet address rather than through personal information. While that enhances privacy, it has also led to criticism as it's complicated to apply rules against money laundering which have been designed for traditional financial institutions.

These institutions – which are the backbone of the traditional financial system were quickly losing credibility when the global financial crisis started in 2007. Bitcoin was designed to provide an alternative system, although the lack of regulation has led to other challenges and to widespread negative perceptions of cryptocurrencies in general.

In a nutshell, cryptocurrencies are a technical innovation with the potential to transform the financial landscape. Whether they will revolutionise or merely reshape the financial system is an open question.

With the world becoming more and more digitalised, it is nevertheless useful to understand cryptocurrencies and why they may be useful for individuals and businesses alike. Once you have grasped the idea, it's relatively easy to understand crypto tokens as well.

What is a crypto token?

The terms "crypto token" and "cryptocurrency" are often used as synonyms. In reality, they are close relatives but not the same person.

Crypto tokens are digital assets built on blockchains. They serve a multitude of purposes, ranging from representing physical assets to granting access to specific services within decentralised applications.

Shares of a company may be represented by crypto tokens, meaning that you can trade tokens on a blockchain even though you don't have access to the stock exchange to trade the actual shares.

The door code to a holiday home could also be a token. Once you make the payment, the token is automatically sent to you so that you can open the door and start your vacation.

Those are just two examples to highlight the wide variety of potential use cases. By and large, a crypto token has an intrinsic utility value and is used to fuel various functionalities within its ecosystem.

While crypto tokens are digital assets like cryptocurrencies, the differences are obvious in the underlying purpose. Cryptocurrencies primarily serve as mediums of exchange or stores of value. Crypto tokens make decentralised applications useful.

In short: cryptocurrencies are money, crypto tokens are something you can buy and sell. That's actually not different from the "real" world.

What's unique about crypto tokens is their association with so-called smart contracts. This term is used to describe blockchain-based software applications which are self-executing when certain conditions are met.

Smart contracts facilitate trustless interactions by automating enforcement and execution of predefined rules. In other words: It's a computer that can make commitments.

Sounds complicated? Just think about your house insurance. After a storm, your roof is damaged and you make an insurance claim. The insurer then refuses to pay for one reason or another.

With a smart contract, this wouldn't be an issue. When both parties agree to the insurance policy, conditions are set in advance. Once the conditions – such as a certain wind speed in your area – are met, payments are automatically made. You won't even have to make a claim.

By leveraging smart contracts, crypto tokens enable an extremely broad range of functionalities – beyond simple insurance policies. Their unique characteristics differentiate them from cryptocurrencies. As blockchains continue to evolve, crypto tokens pave the way for innovative decentralised applications and transformative use cases.

And in our next post, we'll look at some of these use cases.

That’s the end for today! 😢