I found myself searching for a simple explanation of cryptocurrency tokens compared to crypto coins. What is the difference between tokens and coins? This article will examine the difference between tokens and coins. I’ll look at what roles protocols play, and how they all use Blockchain technology. The beginning of this article will be based on the diagram below. I will explain the different layers of the diagram, and how they interact with one another. This article will only focus on Blockchain as a decentralized technology. I realize there are other decentralized technologies, and I’ll look to get into them in future articles.
What is the difference between tokens and coins? We’ll start by examining the below diagram to understand how the different layers within blockchain technology work together in this ‘hierarchy’. The diagram is divided into 4 levels, I will break down each to explain their functionality. I will also explain how the different layers interact with one another to make this system efficient and secure.
Dissect the Diagram
The diagram above illustrates Blockchain technology in a layered approach. There are 4 levels, and they are structured this way purposely. On the bottom, you always have the base. In this case, the foundation is Blockchain technology. For our purpose, Blockchain technology is a group of transactions organized together in blocks. The transactions in the blocks are confirmed by an algorithmic process, whereby the computers confirming the transactions have no ability to append records once approved.
Built on top of this technology, there are many new protocols. A Protocol is a set of steps that are followed to orchestrate transactions within the network. In the diagram, there are 3 listed protocols: Ethereum, Bitcoin, and NEO. All 3 of these protocols have standard operating procedures for actions within their network. The protocol defines such things as the consensus algorithm for validating transactions, the method of communication between nodes, the adoption of new nodes onto the network, etc.
A Flip of the Coin
Each protocol has its own ‘Native’ currency, this is known as a Coin. The Bitcoin network was the first cryptocurrency network, introducing its native coin Bitcoin. Since the creation of Bitcoin, there have been many protocols established. The protocol for the Ethereum network, with its native coin Ether, uses the concept of Smart Contracts. This has allowed for other developers to build on top of their protocol and introduce many new Tokens.
Two tokens that have recently launched their own Mainnet and converted from being a Token to a Coin are Tron (TRX) and EOS. A Mainnet is a platform that allows developers to build dApp (Decentralized Applications) within your network. A lot of people compare the Coin and Token relationship to that of a Landlord and Tenant. The Landlord owns the land and makes the rules. This is the same role of the Coin/Platform. The Token is the tenant, they rent “space” on the platform in order to create their own improvement for the network.
Contracts that are Smart
The Ethereum blockchain uses Smart Contracts which enable developers to create tokens on the Ethereum platform. What are smart contracts, and what issues do they help to resolve? Smart Contracts were originally introduced to us by Nick Szabo in 1997, many years before Bitcoin was created. Szabo’s original idea was to use a distributed/decentralized ledger to store contact information. Smart contracts share many of the same characteristics as traditional contracts. The only main difference is they are completely digital. You can visualize a smart contract as a tiny computer program, with its contents stored on a blockchain.
The below quote describes the function of smart contracts as described by Ethereum founder, Vitalik Buterin:
A smart contract is a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in, and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated.
Decentralized Sports Gambling
To help visualize this example we will use the concept of Sports Gambling. Imagine you are in Vegas, or online in front of your computer, ready to place some bets. The concept of betting is many people (the public), taking their money to a casino or bookmaker to bet on a specific event. The Casino holds everyone’s money, and when the events are completed they keep the funds of the losers and pay funds to the winners. In the process, they also take about 10% profit as fees off of losing bets.
With smart contracts, the Casino is an unnecessary and costly entity in this equation. Using smart contracts, each wager could be its own contract on the blockchain. This contract would store all the bets for a specific event. When the event concludes, the blockchain distributes the funds based on the contracts. Smart contracts inherently give us 2 positive features to enhance the security of transactions. First, smart contracts are immutable, meaning that once created they can never be altered. Secondly, they are distributed, meaning that everyone on the blockchain can access. This prevents one ‘bad actor’ from acting maliciously without everyone else knowing. On another note, when you wager against a casino they have fees built-in to every bet. When betting on the blockchain, wagers are done with little to zero fees.
So Many Use Cases
This simple example of sports gambling is just one of many that you could think of using smart contracts. The insurance industry could also greatly benefit from this type of technology. Insurance is just the pooling of members money, then distributing based on need. Crowdfunding is also an easy use case to envision, a decentralized Go Fund Me network. There is no limit to the number of industries that can benefit, and the benefit really directly affects the end user positively.
I hope you have found this explanation informative, looking at the structure of Blockchain technology. You now know the difference between what a Coin is vs what a token is in cryptocurrency language. This article should have given you the understanding to of how the 4 layers of Blockchain technology operate and work together. Also giving a high-level explanation on smart contracts and what they specifically do. Please feel free to leave comments with any suggestions for future article topics. As always, appreciate you reading. At the time of this article, Bitcoin is trading just under $6,500 and Ethereum is just under $200. Bitcoin dominance is currently at 55.6%.