The Blockchain as the Differentiating Factor between Cryptocurrencies and Tokens.

It is talked about every day and sometimes used as synonymous terms, however, cryptocurrencies and tokens do not always substantiate the same concept.

In order to understand the main differences, one cannot disregard referring to the Blockchain as the characteristic aspect of one or the other term.

What does it mean? Let’s see it together.

Starting from a practical definition of cryptocurrencies, these could be defined as real virtual coins built on their own blockchain which, through cryptography, protects, verifies, and records transactions between two parties.

Another peculiar characteristic is that cryptocurrencies – unlike “simple” tokens, as we will say shortly – can be “mined” with the computer technique of mining, therefore mined thanks to data processing and the computing power of computers connected to the network.

Therefore, an essential condition is that the cryptocurrency is built on a proprietary blockchain, that is developed ex novo as a tool at the service of a specific project (or even multiple projects) that sees the crypto fulfilling a certain function.

In purely theoretical terms, the most frequent use of cryptocurrency lies in the purchase and exchange of any goods or services, exactly like a traditional currency.

Think, for example, of Bitcoin which is currently accepted as a payment method on various online sites and has also gained legal value in El Salvador, with several countries that could follow in its footsteps.

A different story, however, for what concerns tokens.

These can be represented as virtual tokens, units of value accepted by a community and built on an existing blockchain. Therefore, tokens cannot be mined.

Think, for example, of a token developed using the Ethereum blockchain, which is an existing blockchain that the token is an integral part of.

Once this preliminary aspect has been clarified, tokens can be divided into fungible and non-fungible (NFTs).

The former can be exchanged and, in turn, are divided into:

Payment Token -> can be used as a payment method for the purchase of goods and services. They are therefore cryptocurrencies built on an existing blockchain; Utility Token -> attribute certain rights to the holder (e.g. access to a service, right of first refusal to purchase a ticket, etc…) without generating economic benefits; Security Token -> represent real assets and are used as a means of investment. These include Equity Tokens, which represent ownership of a certain activity (think of a company’s shares); Non-fungible tokens (NFTs) cannot be exchanged as they constitute the digital representation of unique or rare objects and have the value of a digital ownership certificate.

In light of this, it can be said that a token can constitute a cryptocurrency (in the case of Payment Tokens) but a cryptocurrency built on an independent blockchain can never constitute a token.

Therefore, from the perspective of an investor, it is important to understand which type of project they are approaching: a cryptocurrency or a token?

To understand this, it is necessary to ask oneself: is the crypto built on an independent blockchain or on an existing one, and therefore, is it a Payment Token?

In the latter case, it will be wise to investigate the credibility of the blockchain on which the Token is based.