On CoinMarketCap’s website, you can find over 1,800 kinds of cryptocurrencies, which can be classified into two major categories: Coins and Tokens. There are around 800 coins and over 1,000 tokens. Common examples of tokens are USDT which is a widely used stable coin and JOY issued by JOYSO.
What is a token? What is the difference between a coin and a token?
Bitcoin (BTC) and Ether (ETH) are popular coins which have their own native blockchains built by their developers. Tokens do not have their own blockchains which makes it easier for development. They just need to take advantage of other blockchains to create the tokens. The process of issuing the tokens such as ICO is by deploying smart contracts onto other blockchains (Ethereum, Nebulas, etc) that are already online.
To conclude, the difference of a coin and a token is whether it has its own blockchain.
With coins and tokens, there are many other technologies that surround the functionalities of these. Needless to mention Bitcoin (BTC) with a monetary value of over USD6,000 per piece where JOY allows you to transact at a discount rate on their exchange. For starters, you may need to understand “Smart contract”.
What is smart contract?
Tokens are not only closely related to smart contracts, but also a common type of smart contracts. So you have to understand what is smart contract if you want to know more about tokens.
Smart contracts are contracts that will execute automatically without the intervention of third party. When the conditions set in advance are fulfilled, programs will execute the terms specified on the contract by themselves. With this feature, smart contracts are very suitable for issuing/sending/receiving/trading tokens, because they are highly secure and automated, there is no “closed of business days” throughout the whole year.
Users must have faith in the operation of smart contracts, otherwise the automation cannot provide any practical value. Think about common websites. They function like smart contracts because they can run by themselves with the specified rules of how the websites interact with user. For example, if users make certain actions like clicking the “buy” button, it will trigger the website to display the payment information. However, these websites lack a key element: being trusted without the presence of a fair third party.
First, without a fair third party, you will be worried about whether the transaction will be fulfilled or not. And most websites are powered by private server where their source code is not made public. If the owner of server is not 100% fair, users’ data will be in danger of being altered or sold. In this case, most websites are operated by credible owners (Citibank, Twitter, etc), so users can trust the website to operate as they claimed.
Besides, it’s not easy for the users to identify the factuality of the websites. For example, a famous exchange was hacked and many users’ funds were transferred illegally. However, the investigation pointed out that this incident was not caused by the defected security measures. Instead, the hackers built a fake phishing site with address that is very similar to the original one to collect users’ accounts and passwords.
Based on the two points above. Even common websites can operate by themselves, but they can’t be viewed as smart contracts. In fact, the concept of smart contracts was introduced by a scholar Nick Szabo in 1994. But there wasn’t any suitable environment or solution to make smart contracts become universal. Until Bitcoin was introduced in 2008, blockchain can provide a perfect environment to run smart contracts. And now we have Ethereum which is an upgrade version of Bitcoin’s blockchain where it can support any kind of smart contracts, including popular ICOs (Initial Coin Offerings) and game DApps (Decentralized Applications), not just for financial usage.
Article by wqqhou, JOYSO
Read more: Coins and Tokens 101 (Part 2)