All existing digital currencies can be divided into five types. The differences between these types are very important for investors, as they determine what exactly they invest in and who can invest in them.
Coins vs. Tokens
The biggest differences in the cryptocurrency industry are between a token and a coin.
This is what distinguishes a token from a coin - a coin has its own blockchain, but a token does not. Most of the major cryptocurrencies - Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP) - are coins. Each of them has its own decentralized p2p network, which records all transactions in a digital ledger.
The token, on the contrary, does not have its own blockchain. The Ethereum blockchain is the most popular place to create a token, although in theory it can be created on any blockchain.
0x (ZRX), Maker (MKR) and Basic Attention Token (BAT) are examples of ERC-20 tokens, their protocol exists on the Ethereum blockchain.
Coins function as currency, and the token provides access to a product or “stock”.
Since the coin has its own blockchain, it serves as a medium of exchange within this network. That's why Bitcoin is called digital gold - it is used as a store of value. Additionally, it is much easier to convert a US dollar into a coin than into a token.
Utility token vs security token
Understanding the difference between these two types of cryptocurrencies is of utmost importance for investors, cryptocurrency companies and governments. In other words, the Securities and Exchange Commission (SEC) regulates security tokens much more strictly, since they are considered digital securities (security).
Most tokens are utility tokens
If you can buy or sell a token on a cryptocurrency exchange without being an accredited investor, then you are dealing with a utility token. In general terms, such a token gives the investor access to a service or product. Utility token developers are also often involved in the development of smart contracts and dApps.
BAT is a utility token integrated into the Brave browser that serves as a means of paying for viewing advertisements. Anyone can trade this token on cryptocurrency exchanges. It works like this:
-Users receive BAT for agreeing to view ads.
-Content creators receive BAT when users watch ads on their site.
-Advertisers buy advertising space for BAT.
Security token is a security that exists on the blockchain..
Like securities, security tokens represent part of the ownership of an asset that is not on the blockchain, but in the real world. Due to the fact that the SEC regulates such tokens as securities, in order to participate in an STO (security token offering) you must be an accredited investor.
The SEC decides whether a cryptocurrency is a security token using the “Howey” test. In simple terms, this test determines whether an investment in this cryptocurrency is speculative, which means that the investor receives money for the activities of a third party.
What are stable coins?
Stablecoin is a fairly popular type of cryptocurrency, especially during a bearish market trend. Stable coins are pegged to traditional assets like fiat or gold. For example, theoretically the exchange rate between a US dollar-pegged stablecoin and the dollar is 1 to 1. Companies that develop a stablecoin should have the same number of assets in bank accounts as how many tokens are in their turnover.
Their advantage is that during a bearish trend, cryptocurrency investors can transfer their funds to a more “stable” asset class. In the absence of stablecoins, this would require conversion to US dollars, for which exchanges charge fees. When the bullish trend returns, investors can convert their stablecoins into their desired cryptocurrency for virtually no cost.
Historically, stablecoins have broken their peg to the dollar. For example, USDT was once worth less than a dollar, while GUSD was worth more than the dollar.
Even though they are called stablecoins, they are actually tokens as they do not have their own blockchain. Maker (MKR) exists on the Ethereum blockchain. Tether (USDT) was built on the Bitcoin blockchain. Both of these “tokens” function as “currency”, which is a characteristic of coins, not tokens. As new applications for digital currencies are developed, the differences between them are becoming increasingly blurred, making the SEC's job more difficult...
Why is all this information needed?
Does anyone really care about the differences between cryptocurrencies?
Although the world of digital currencies is still shrouded in fog, any clear-headed investor should be aware of the value of the cryptocurrency they are considering investing in, as well as how that cryptocurrency will be regulated by the Securities and Exchange Commission.
The differences between cryptocurrencies matter. After all, the difference between coins and tokens represents two possible options for the evolution of cryptocurrencies - cryptocurrencies as tokenized securities and cryptocurrencies as means of payment.
According to www.entrepreneur.com
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