Altcoins and Tokens: Which Is Which?
Cryptocurrency swept the world off its feet when it was launched. Many people were quick to do their research and invest in it, anticipating that digital currencies would someday become widely accepted throughout the world. They predicted right, and today, we find that cryptocurrency can be a very interesting investment.
Altcoins and Tokens
Cryptocurrencies are digital currencies that are not controlled by a central authority. Their decentralised nature is due to blockchain technology, which is a public ledger that keeps track of transactions.
Blockchain technology is an invention of Satoshi Nakamoto and is viewed as the beginning of a new type of Internet. The blockchain technology makes sure that transactions made over the Internet are secure, using cryptography and other sophisticated processes.
Because cryptocurrency has become mainstream since its implementation, many different types have been developed. Today, there are two common categorisations of cryptocurrencies: the altcoin and the token.
Altcoins are alternative digital cryptocurrencies that exist apart from Bitcoin. They are a way of exchange that uses cryptography to record and secure transactions. On the other hand, tokens are typically used to access the features of blockchain-based projects that are not meant to function as digital currency. Compared to coins, tokens are more functional.
Most coins do not function as a medium of exchange and are instead used as commodities. This implies that the term ‘cryptocurrency’ is not accurate, since this term applies to a unit of account, a medium of exchange and a store of value. Nevertheless, it is important to remember that both altcoins and tokens are considered as cryptocurrencies, regardless of their functions.
What is an Altcoin?
The word ‘Altcoin’ comes from the term ‘alternative coin’ and refers to cryptocurrencies that were launched after the success of Bitcoin. Altcoins are simply digital coins that are not related to Bitcoin.
They can be different from Bitcoin in a lot of ways. An altcoin may have an alternate method for distributing coins or have another mining algorithm. The majority of altcoins modify some parameters that are not very important, in order to conceive a new type of coin with varied features. Namecoin, Peercoin and Litecoin are examples of altcoins.
There are altcoins that are not derived from Bitcoin’s trademark open-source protocol. Instead, they have their own protocol and their own blockchain. Examples include Ripple, Omni and Ethereum.
What makes altcoins similar to each other is that they all have their own independent blockchain. This is where transactions related to their native coins occur.
What is a Token?
A token represents a utility or an asset that oftentimes resides on top of a blockchain. Tokens are a representation of basically any tradeable asset, such as loyalty points or other commodities.
To create a token, you do not have to build blockchains from scratch or modify codes. All you must do is follow a template on the blockchain to create your token. This Is due to smart contracts, which are self-executing codes that do not require third parties.
Tokens are distributed through an Initial Coin Offering (ICO). An ICO is a method where funds are raised for a new venture into cryptocurrency. It is generally used by start-ups to avoid the strict process of raising capital, which is required by banks and lenders. During an initial coin offering, tokens are sold to early backers for legal tender.
Being involved in cryptocurrency may present a challenge, since the terminologies can be confusing. However, we are always free to research on what would be a beneficial investment, and what we should avoid. Buyer beware, and make sure to do your research first before deciding to invest.