CryptoMyths #1: What Have I FOMOed?

For almost every crypto investor, 2018 ended with a further meltdown. The price of the leading coin Bitcoin dramatically falls from US$19,000 surge to US$3,500 plunge. Among those who have put both their money and faith in cryptocurrencies believing that blockchain as technology will be going to change the world and they can get rewards from it. How many of them really understand what they were investing in? When we asked some retail investors in crypto meetups in person on how they saw crypto assets in these few months, “All are scams!” were frequently quoted – adding that they would no longer invest in those bumbling virtual assets again.

Of course, other crypto believers not only told us that the current painful market price was just showing a technical adjustment, but also challenged those ignoring the impact of cryptocurrencies on the world. However, those people with good faith in the newly born digital assets did not present us a certain level of understanding on those projects they support, when asked some in-depth questions, such as mining mechanism of Bitcoin. Better than nothing, they answered in a somewhat ambiguous way, like “deploying computer to calculate something for the people”. Or when questioned about the feasibility of newly promoted consensus algorithms, they only know the superficial layer, rather than giving a promising and detailed explanation. 

For those who think that cryptocurrencies were scams, this is not necessary to further explore what cryptocurrencies are. It really saddens us, since most of the crypto assets particularly utility tokens seem to be considered as a scammy music chair game. While part of investors have lost our confidence in cryptos, the believers do not fully know whether the surprising crypto projects can create tangible impacts in the real world – it is nowhere a promising arena for the latest technology to grow. Even if blockchain technologies or cryptocurrencies penetrated into people’s life, the users might not be required to understand so much about cryptocurrencies. For those who still think that cryptocurrencies will somewhat improve the society we are living want to invest in cryptocurrencies but had not studied much about this in the last mania.  

They have the responsibility for understanding what they are buying. At least they need to know what type of cryptocurrencies they are going to buy. Maybe right now it’s time we took a clear look into the problems. From now on, BlockImpact will launch a new article series – “CryptoMyths” to pinpoint a bunch of common confusions among crypto investors.  

We do not start from the ground (i.e. Crypto/ Blockchain 101) which 99% of those information can be found on Medium, but drill into the remaining 1%. In today’s “1%”, we will try to explain the difference between coins and tokens, not based upon an academic definition but our own experience of analyzing cryptocurrency projects. Of course, it is never near to perfection, and we welcome your comment below for further discussions. 

Token VS Coins

Token is the fundamental concept describing the transaction unit on the blockchain. Bitcoin transferred on the bitcoin network should be called “Bitcoin token”.  Token is a certificate of equity in the digital form which represents a right and an intrinsic value. The range varies from currencies to bills and from stock to securities. Market participants need a definition between the infrastructure projects and decentralized applications. Therefore, tokens in the market are now generally referred to the cryptocurrencies depend on a blockchain infrastructure. In most cases, each type of token has their own specific use in various decentralized applications or protocols. That means users who hold a specific token are granted a right to enjoy certain functions in the specific network.  

A decentralized application is a computer or mobile application that requires no central authority to manage. The application is built on a blockchain that they have tokens to be used and transferred into the application’s address. These kinds of tokens have their corresponding utilities on these specific applications. Say, Augur is a utility token project constructed with its token, REP. Users are capable of utilizing REP to open a prediction market in Augur, however unable to spend those tokens on other decentralized applications and the value of the REP depends much on the demand on utilising REP in the Augur network. REP is an ERC-20 token inside Augur’s ecosystem on the Ethereum blockchain network that acts the main infrastructure of Augur network.  Since token now generally refers to those listed cryptocurrencies built on a separate main blockchain network, we should not consider REP as a coin but a token.

Coins are generally referred to cryptocurrencies with their own blockchain network and infrastructure for smart contract building. In order words, in most cases developers will have their owned network to trace the native tokens’ transaction history on the blockchain. For example, everyone can just go to Bitcoin Explorer via https://btc.com to keep track of on Bitcoin’s blocks in a transparent and convenient way, whereas Etherscan is the most popular block explorer of Ethereum.

Amid the current development of the crypto space, there are two major technical uses –  transfer of value and smart contract. Transfer of value is indeed the transaction unit on the blockchain, which is far from current digital currencies which are never similar to 1 unit in an Octopus Card topped up with 1 Hong Kong Dollar. The first cryptocurrency project, Bitcoin is built to ideally mediate the problem of the misbehaviour traditional financial market, as a public ledger accessible for everyone to transparently record transaction records. Unlike the digital currency like the unit in Octopus card, Bitcoin is created on the ledger’s unit. Some projects after Bitcoin try to improve Bitcoin’s problem such as scalability and transaction fee. 

Smart contract allows blockchain to automatically execute certain condition for transferring value. Further development allows blockchain to be applied as software so that the application can execute certain conditions for value transfer. Other decentralized applications, built on a main blockchain, allow the tokens can be used as certain rights to enjoy their functions inside. 

This means coins refer to the networks with their owned blockchain and their owned consensus algorithm. Take Bitcoin as an example, its consensus algorithm is Proof-of-Work which mechanism is that miners are required to solve the block hashes to win the rewards. The transactions to be verified will be put into a block, and hence the block hashes will be mined by calculations of hash value that is lower than a certain value. What should be noticed is that there are some cryptocurrencies which are in-between coins and tokens. Because they planned to be an infrastructure project but will launch its owned blockchain in the future. In this case, this should probably consider it as token before they have their owned blockchain.  

Next week, CryptoMyths will discuss what a retail investor should evaluate while choosing their favoured crypto coins and tokens, and also try to address the problems within the currently listed tokens.  

Website：https://blockimpact.tech/