DeFined: Cryptocurrency vs. Token vs. Altcoin Explained

The cryptocurrency landscape, indeed the “Web3” industry as a whole, is evolving rapidly. As more participants join the market as investors, users, builders, or simply sidelined observers, it’s inevitable that new tools, protocols, startups and their tech will create evolving use cases for blockchain technology.

As the industry expands from simple store-of-value assets and record-keeping utility, we find exciting new ares of interest around, for example, NFTs, ownership, gaming, governance, interoperability, etc.

Naturally, it makes sense that the way we consider and use industry terms and their definitions will evolve and adjust to fit new applications and changing use cases. It’s likely that we’ll continue to see entirely new words and acronyms being created around use cases and technologies born from Web3’s progress over time.

This is not unlike traditional languages around the world, which are fluid and evolve as new generations create their own words or bring their brand of changes to the language itself. We should embrace these literary changes just as we have embraced the opportunity of what blockchain can do for various markets around the world.

First, let’s outline a basic understanding of what a digital asset is.

In a general sense, we can regard digital assets to mean anything of value that can bought, sold, stored, or transferred in a digital format.

This can include assets like fiat currencies, like dollars or euros, stocks and equities, and other goods like collectable art, objects like in-game tools, features, or other visual elements, corporate or real estate ownership, access to private events, clubs, or memberships, and, cryptocurrencies and tokens as we know them today.

In this regard, “digital assets” is a bit of an umbrella term that we can use to reference all digitized assets of value. We can effectively understand that all cryptocurrencies and tokens can be referenced as digital assets, but not all digital assets are cryptocurrencies or tokens.

When assets like US dollars, stocks, or commodities are moved onto the blockchain, we’ve taken a tangible asset or good and leveraged blockchain technology to “place” this asset onto a digital network, like Ethereum, for various investment or trading purposes. In the context of crypto, or Decentralized Finance (DeFi), this is sometimes referred to as tokenization.

The exciting thing about tokenization is that it can open new possibilities for accessibility, interoperability, and transparency in ways not fully experienced in traditional finance. Note that the term tokenization and its wider meaning extends beyond (and before) the context of cryptocurrency investing.

Here’s a simple look at digital assets and how cryptocurrency and tokens fit among them. Note that this diagram is not an all-encompassing outline of digital assets as an entire asset class.

Now that we understand the idea of digital assets, let’s explore the specific ideas of cryptocurrency, tokens, and altcoins, and how we can define the three.

A cryptocurrency is typically regarded as the native asset of a blockchain. By “native”, we mean the asset that is issued by the blockchain’s protocol and rewarded to miners (PoW) or validators (PoS), or used to pay transaction (gas) fees to interact with the chain, send transactions, etc.

Two examples of cryptocurrencies are Bitcoin (BTC), which is native to the Bitcoin network, and Ethereum (ETH), which is native to the Ethereum network.

Cryptocurrencies like Bitcoin and Ethereum are used as, and considered to be, stores of value and mediums of exchange.

Tokens are assets built and used by protocols (projects) on top of an existing blockchain. For example, Uniswap is one of the post popular Decentralized Exchanges (DEX) in the world and is built on the Ethereum network. Uniswap’s native token, UNI, has various use cases and investors may choose to buy and hold this token as a part of their overall portfolio.

Two other examples of tokens can include the stablecoin USD Coin (USDC), and Chainlink (LINK), both of which have their own use cases and can be found, acquired, traded, etc. across multiple blockchains.

The use cases and utility of tokens depends on the efforts and ideas of the team behind the project. Many projects choose to fundraise via their token sales, via an initial coin offering (ICO) which is not unlike a traditional company IPO. Based on the team’s skill, product vision and roadmap, presented plan and functionality for the token, investors may be interested in buying at an early stage.

• In this context, some may make the argument that tokens can be inherently more centralized vs cryptocurrencies like Bitcoin, which are generally mined and considered more evenly distributed over time.
• To be fair, though, large-scale blockchain projects with native cryptocurrencies can also raise significant funding by selling their native asset to early investors.

Tokens can be used for protocol governance, for security purposes, act as stores of value, as an investment tool in the context of DeFi, as an in-game reward — whatever the project team / token designers decide.

• Some tokens, unfortunately, have very little use case and, subsequently, very little value. Others are outright scams. This is part of what makes investing in the industry highly risky for the average user.

Developers and their protocols use smart contracts to create the functionality of their tokens. Teams can leverage this technology to program token features, interoperability, engagement and accessibility standards so members of the blockchain community and participants of their protocol can access and interact with their tokens as intended.

Usually, the code behind the tokens and the protocols themselves are made available to the public for review. This is not always the case, however, so it’s important that investors and participants do as much research as possible before interacting with tokens to safeguard their data, wallets and other assets held within them.

Other Ways of Tokenization

Additionally, we can see tokenization of other assets, like art, music, or real estate with NFTs, or the tokenization of equities like stocks, or commodities like gold.

• Platforms like Synthetix or DeFiChain offer users the ability to have tokenized exposure to the prices of some equities or commodities.
• An example of tokenized commodities can be Paxos Gold (“Pax Gold”) – PAXG token, which is tokenized gold backed by a specific ratio of gold per token.

The tokenization of these — and other — assets opens doors for accessibility, transactional speed, transparency, and interoperability — many of the exciting themes behind the concepts of blockchain are being applied to assets and asset ownership.

For the most part, “altcoin” (a combination of “alternative” and “coin”) has been used to refer to any cryptocurrency or token besides Bitcoin. However, in recent years, the term has grown to mean any cryptocurrency or token besides Bitcoin and Ethereum.

• This is not the case for everyone, and it’s important to keep in mind that terms and meanings do change over time.

If you subscribe to the definition of an altcoin as “any cryptocurrency or token other than Bitcoin or Ethereum”, then you can consider the term “altcoin” to include both cryptocurrencies and tokens.

This is because, for example, assets like AVAX (Avalanche) or FTM (Fantom) or BNB (Binance) are cryptocurrencies, not tokens, as they are the native asset for their respective blockchains.

• Digital Assets: Assets stored, bought, sold, swapped, invested (etc.) in a digital format.
• Cryptocurrency: The native asset for a particular blockchain, like Bitcoin or Ethereum
  • • Typically considered a store of value and medium of exchange.
• Token: The assets created by projects building on top of a blockchain, like Uniswap.
  • • Can be used for a variety of uses based on the developer, project that created them.
    • Typically those uses include investment value, governance, security, access, ownership, etc.
• Altcoin: Cryptocurrencies or tokens that are not Bitcoin or Ethereum.
  • • Note that some in the industry may still suggest that Ethereum is an altcoin; that Bitcoin stands alone.
• Cryptocurrency and Tokens (and Altcoins) can all be considered Digital Assets
  • • Not all Digital Assets are Cryptocurrency or Tokens or Altcoins

As we mentioned above, the use cases for blockchain technology are expanding. The coming years will bring new ideas and innovation much of the market hasn’t begun to consider. As these initiatives are built, the terms and definitions we’ve covered are certain to change to accommodate that progress.

Embrace it.