There is a lot of confusion in the cryptocurrency space surrounding these terminologies. We oftentimes hear or read these terms being used interchangeably and probably most people think they really are referring to one and the same thing. Little did they know is that there are indeed differences among these terms — both major and minor.
This article will attempt to get things straight. It aims to digest and explain how these terms differ from one another in the simplest way possible that even newbies can grasp.
As we go along with the explanation, it is inevitable not to discuss these terminologies as well: Centralization, Decentralization, Blockchain, Cryptography. Let’s dive in shortly to these terms first.
CENTRALIZED CURRENCY vs DECENTRALIZED CURRENCY
When we say centralization or centralized currency, it means that it is controlled and run by a corporation or a single entity. This creates more ‘stability’ as they’re the ones who set the price and decide where, when, and how the coin is traded.
Decentralization or decentralized currency, on the other hand, is one that uses multiple entities to operate the coin, spreading a load of a blockchain across multiple nodes (computers). Traders and investors have the additional control over the coin in many of the stages of its development and trade due to the fact that it is operated by innumerable people and not by a single person or company.
It is important to note, however, that centralization or decentralization doesn’t only apply to cryptocurrency. Similar concepts apply across a wide range of technologies.
For example, Facebook is a centralized system, as all information is run by a central server. On the other hand, torrent networks, which allow users to host the same files, allow much faster download speeds than a traditional centralized server, and is a strong example of decentralized file sharing.
Centralized systems in any form, including currency, are liable to issues with having a singular entity in control. Since the systems are completely controlled by one entity, this means that if one entity makes a mistake or acts in a corrupting manner, the entire system could suffer.
BLOCKCHAIN and CRYPTOGRAPHY
A Blockchain is, in its simplest of terms, a time-stamped series of immutable records of data that is managed by a cluster of computers not owned by a single entity. Each of these blocks of data (i.e. block) is secured and bound to each other using cryptographic principles (i.e. chain).
The Blockchain network has no central authority — a very good definition of a decentralized system. Since it is a shared and immutable ledger, the information in it is open for anyone and everyone to see. Therefore, anything that is built on the Blockchain is by its very nature, transparent and everyone involved is accountable for their actions.
A Blockchain has an infrastructure cost but it has no transaction cost. It is a simple yet ingenious way of passing information from A to B in a fully automated and safe manner. One party to a transaction initiates the process by creating a block. This block is verified by thousands, perhaps millions of computers distributed around the net. The verified block is added to a chain, which is stored across the net, creating not just a unique record, but a unique record with a unique history. Falsifying a single record would mean falsifying the entire chain in millions of instances.
Cryptography, on the other hand, is a method of using advanced mathematical principles in storing and transmitting data in a particular form so only those, for whom it is intended for, can read and process it. Simply put, cryptography refers to the use of encryption techniques to secure and verify the transfer of transactions.
Now that we’ve broken down these common terms that are associated with our topic, let’s jump in to explain our main subjects: tokens, coins, altcoins, digital currency, virtual currency, and cryptocurrency.
These are digital currencies that are native to their own blockchain. Bitcoin (BTC), Monero (XMR), and Ethereum (ETH) are examples of cryptocurrency ‘coins.’ What is common to all of them is that they exist on their own independent ledgers: BTC operates on the original Bitcoin blockchain; ETH is used within the Ethereum blockchain; XMR exists on the Monero blockchain, and so on. All of them may also be sent, received, and/or mined.
Coins tend to have the same features as money: fungible, divisible, portable and are limited in supply. They are meant to be used just like physical cash. Except for Ethereum which functions beyond its ‘money’ role because it is used within the Ethereum blockchain to facilitate transactions.
Altcoins are basically the alternative cryptocurrencies that were set out into the world following the success of Bitcoin. Most of them consider themselves to be a better substitute for Bitcoin. The term “altcoins” literally translates to ‘alternative coins,’ specifically, they are coins that are surrogate for Bitcoin which means that altcoins are a fork of Bitcoin and were developed using Bitcoin’s open-source protocol. Common altcoins include Litecoin (LTC), Bitcoin Cash (BCH), and Dogecoin (Doge).
These are digital assets that can be used inside the ecosystem of a given project. The basic distinction between tokens and coins is that tokens require another blockchain platform to operate. Ethereum is the most common platform to create tokens mostly due to its smart contract feature. Tokens created on the Ethereum blockchain are usually known as ERC-20 tokens.
Many tokens are created to be used within decentralized applications (dApps) and their networks. However, those are called “utility tokens.” Their main intention is to grant the holder access to the project’s function. They help in building an internal economy within the system. Utility tokens simply provide users with a product and/or service. Companies have used these utility tokens to raise millions of dollars in funding.
Further, there are also “security tokens,” which essentially represent one’s investment in a project. Although they take value from the startup behind the project, they don’t give the holder actual ownership in that startup. Security tokens usually derive their value from an external, tradable asset. Because the tokens are deemed security, they are subject to federal securities and regulations.
In simpler terms, a token is classified as security when there is an expectation of profit from the effort of others. At its very essence, a security token is an investment contract which represents legal ownership of a physical or digital asset like real estate, ETFs, etc. This ownership must be verified within the blockchain. After the ownership is verified, security token holders can trade away their tokens for other assets, use them as collateral for a loan and store them in different wallets.
DIGITAL CURRENCY vs VIRTUAL CURRENCY vs CRYPTOCURRENCY
Digital Currency is a blanket term used to describe all forms of electronic money — be it virtual currency or cryptocurrency. Digital currencies’ defining feature is that they exist only in digital or electronic form, thus, they are intangible. They can only be owned and spent online via electronic wallets or designated connected networks.
Virtual currencies are a different beast, even though they are digital by definition. As the European Central Bank first defined the term in 2012, a virtual currency is “digital money in an unregulated environment, issued and controlled by its developers and used as a payment method among members of a specific virtual community.”
Coins, tokens, and virtual currencies are all digital currencies.
A cryptocurrency is a digital form of currency that utilizes cryptography for a security. Because of the security feature, it is generally very difficult to counterfeit. A conventional cryptocurrency is a currency that is primarily a system whose sole purpose is either making or receiving payments on the Blockchain. Bitcoin is the most well-known cryptocurrency. Nowadays, there are a lot of working cryptocurrencies with various functions or specifications. Some of them are clones of Bitcoin while others are simply variants of it.
Definitions for cryptocurrencies tend to vary among or even within jurisdictions: In the United States alone, five different regulatory agencies define cryptocurrencies in five different ways, depending on their purview. Thus, the IRS views cryptocurrencies and most other virtual currencies as property, SEC thinks they represent securities, while the Financial Crimes Enforcement Network thinks that cryptocurrencies are money. Further, Japan’s regulatory framework for cryptocurrencies — the Payment Services Act — defines “cryptocurrency” as a property value, and the head of Russia’s central bank once called Bitcoin a “currency surrogate.”
The cryptocurrency world can be extremely hard to wrap our heads around, especially since its underlying technology — the Blockchain — is shrouded in computing language and terminologies that are technical in nature.
We do hope this article somehow helps you understand the overwhelming yet exciting cryptocurrency space.