Those who are just starting out in the crypto industry often think that crypto and tokens are the same thing. Both types of crypto assets can be traded on exchanges and transferred between blockchain addresses. Cryptocurrency is an alternative to money, which allows it to be used as a means of exchange, for savings, or to fulfill both purposes at once. Functionally, all cryptocurrencies are interchangeable. This means that one coin is worth the same as any other.
For example, Bitcoin and other early cryptocurrencies were developed as currencies. But later blockchains are designed for advanced functionality. Ethereum, for example, in addition to being a currency, allows developers to run code (smart contracts) in a distributed network and create tokens for decentralized applications.
Crypto tokens can be used like any other crypto, but they stand out for their greater flexibility. Developers can introduce millions of identical tokens or issue only a few with unique properties. They can be used for a variety of purposes, from digital receipts indicating a stake in a company to loyalty points. The protocol that supports smart contracts involves the separation of the base currency (used to pay for transactions or applications) directly from the crypto tokens. If we talk about the Ethereum project again, ETH acts as the native currency here: it is needed to create and transfer tokens on the Ethereum network. The crypto tokens themselves are implemented according to ERC-20 or ERC-721 standards.
Pros and cons of crypto
First of all, it is worth mentioning the advantages offered by digital coins:
- No intermediaries. To transfer money to another user, you only need an Internet connection. Third parties such as banks and other institutions are excluded in this case;
- Almost instant transactions. The speed of transfers is significantly increased compared to the banking system, as there are no intermediaries in the chain;
- Immutability of records. Cryptography in cryptocurrencies works in such a way that no one can change the records of transactions that have already been entered into the blocks. This eliminates manipulations and fraudulent activities;
- Simplified money transfers across borders. If you want to transfer money from one country to another, crypto assets are a great option for an intermediate currency. How it works, for example, if you want to send dollars from America to Ukraine: first, you convert to crypto, then perform a crypto transaction, and then convert the cryptocurrency to fiat. This is one of the ways to make cross-border payments.
Disadvantages to be aware of:
- A digital trace that can be used to identify the owner. Despite the anonymity of crypto activities, some agencies, such as the US FBI, can decrypt the trace. This allows the government to monitor the financial transactions of the population;
- Use for money laundering and illegal purchases. However, this is now becoming less common, as there are reliable methods for finding and blocking such accounts with subsequent prosecution;
- Concentration. When studying the basics of crypto trading, you will learn about the term “whale”. This is a user who concentrates so many cryptocurrencies that it makes it possible to influence the exchange rate;
- Mining requires a lot of energy. However, this problem is gradually being solved by a more environmentally friendly model of creating new coins;
- Low reliability of some crypto exchanges and wallets. Last year, hackers hacked the Wormhole, a technical bridge between blockchains. During this attack, $325 million worth of crypto assets were stolen. To support the development of Wormhole, Jump Trading replaced the stolen money;
- Strong volatility. However, this feature can also be considered a plus, because with some knowledge and experience, you can make money on sharp price fluctuations.