It is a challenge to be able to explain certain technology (or anything) in a concise, simple, and easy to understand way without sacrificing its meaning. In this case, we have tried to explain the big difference between Cryptocurrencies and Tokens. Here we go…
A Cryptocurrency or a coin such as Bitcoin, Litecoin, Dogecoin, Ether (the cryptocurrency of the Ethereum protocol) are, to a certain extent, very similar to Fiat currencies (legal tender issued by a central bank of the government of a country). The difference is that a cryptocurrency is digital money whose transactions are registered in a Blockchain which is global, decentralized, and democratic. These cryptocurrencies can be used as an investment, to pay for products or services, or to send to friends or loved ones. Very similar to the use we make of Fiat money or regular money as we know it and use it.
On the other hand, Tokens, although they also have a value that fluctuates constantly and their transactions are also registered in a blockchain, they are different in the sense that they can only be used within a defined ecosystem. For example, we could launch a token which aims to incentivize our members. Every time a member signs up for a class, it could receive a certain number of tokens. Later, if this particular member buys a product from our website, she/he could receive more tokens for the transaction and so on. Eventually this person could collect a certain number of tokens and have the option of exchanging them for a product or service within our ecosystem or company.
This method has already been used for years by airlines and credit card companies. The more airline tickets we buy, the more miles we accumulate within that particular airline, which can be exchanged in the future for travel or other services, but only within that airline. As for credit cards, these companies allow us to accumulate points when we use them, and consequently change these points for other products, or deposit them as a form of payment to pay off our balances within the ecosystem of that particular credit card.
The difference is very important to understand since every day we will see more and more companies launch tokens using “Blockchain” technology in order to incentivize customers and be able to store all the data related to the token in a blockchain. Blockchain also allows adding a value to the token (like a currency), which can be speculative for investors or exchanged for other tokens (to be used in different ecosystems) or cryptocurrencies, turning these tokens into something much more global and financially flexible.
There are many applications for tokens and it is a technology that will continue to grow and develop. As always, our goal here is to help you digest the most dense information.