What’s The Difference Between A Cryptocurrency, A Token, And A Cryptographic Token?
When we talk about cryptocurrencies, we’re collectively referring to digital tokens like bitcoin and Ethereum. We’re also talking about ICO tokens, security tokens, and other digital assets. “Cryptocurrency” is a broad term, however, and there’s a significant difference between a cryptocurrency like bitcoin and a digital asset like Ripple.
Our friends at Bitcoin Garden recently published an article written by DistributedLab explaining the difference between cryptocurrencies and non-cryptocurrencies. The author defines what, exactly, a cryptocurrency is – including how cryptocurrencies differ from non-cryptographic tokens.
Why do some people call bitcoin and Ethereum a cryptocurrency – but they claim Ripple (XRP) is not a cryptocurrency? Well, these people don’t have a specific problem with Ripple. Instead, they’re just defining “cryptocurrency” with certain rules.
With that in mind, let’s take a closer look at the differences between cryptocurrencies and non-cryptocurrencies.
What Is A Cryptocurrency?
A cryptocurrency is a cryptographically secured currency. That part is obvious – it’s in the name.
The best definition of a cryptocurrency by today’s standards, however, is this: it’s an independent digital currency. Independence is the key feature here. To achieve independence, a currency must decentralize the following processes:
- Decentralized Issuance: New cryptocurrency coins are issued based on an algorithm. This algorithm and its issuance terms are determined by a previously-decided monetary policy. There’s no centralized authority making decisions about the issuance of tokens.
- Decentralized Transaction Validation: Transactions are authorized by anyone in the network. Anyone can participate in the validation process.
- Available to Anyone (Decentralized Availability): The system is open for use for all and has no registrations or permissions.
- Data is Accessible to Anyone (Decentralized Data Storing): Data is available to anyone. Anyone can store and verify data on the cryptocurrency network.
Other key features of cryptocurrencies include:
- Everyone can synchronize with other nodes to verify the accuracy of transaction history on the cryptocurrency network
- No single person or authority has the sole ability to make decisions; instead, decisions are made mutually through a governance system or an online community
If any of the above processes occurs in a centralized way, then it’s not a true cryptocurrency.
Why Isn’t Ripple (XRP) A Cryptocurrency?
Look at the definition we outlined above. A cryptocurrency has decentralized transaction validation, decentralized issuance, decentralized availability, and decentralized data storage. There’s no single authority governing a cryptocurrency network.
Ripple, however, is not considered a cryptocurrency by the definition above. With Ripple (XRP), transaction validation is not really decentralized. Only a limited number of parties can validate transactions on the Ripple network.
At the same time, token issuance on Ripple is completely centralized: Ripple’s creators – a for-profit corporation – are in complete control of how the coins are issued and distributed. As DistributedLab explains, “it’s fundamentally wrong to call Ripple a cryptocurrency.”
That doesn’t mean Ripple is bad: it’s one of the best digital currencies in the world today. It was designed from the ground-up with different goals than cryptocurrencies like bitcoin.
What Is A Token?
The word “token” gets tossed around nearly as much as the world “cryptocurrency” gets tossed around.
What exactly is a token? There isn’t a fixed definition for a token. Generally speaking, however, tokens are never currencies. They’re digital assets that play various roles in various systems.
Tokens exist outside of the digital world. A subway token grants you access to the subway, for example. The US Dollar originally acted as a token for the price of gold. It was fixed to a specific unit of gold.
Typically, when a cryptocurrency blog like ours refers to tokens, however, we’re referring to cryptographic tokens.
Cryptocurrency coins are cryptographic tokens. A cryptographic token is a much narrower term than just “token”.
Here’s how DistributedLab defines it:
“A cryptographic token is an accounting unit that is being used to represent digital balance in a certain asset, whilst the ownership of a token is evidenced by the aid of certain cryptographic mechanisms, for example — digital signature.”
This is where things get a little confusing: bitcoin and other cryptocurrencies are cryptographic tokens, but not all cryptographic tokens are cryptocurrencies:
“[A] cryptocurrency coin is a cryptographic token, but it’s never the other way around, meaning that not all cryptographic tokens are cryptocurrencies.”
Cryptographic tokens can represent a number of different things. They play different roles in different systems. Cryptographic tokens can include all of the following, for example:
- Digital obligations
- Any currencies (cryptocurrencies or digitally-represented fiat currencies)
- Ownership rights
- Rights for a service
Ultimately, cryptographic tokens are just a unit of account in a specific type of digital accounting system. Typically, the “digital accounting system” is a blockchain-based platform. A company might “tokenize” shares by placing them on the blockchain, for example, and then sell shares through a regulated security sale. These shares confer the same rights as they would if you purchased an ordinary share from an ordinary financial marketplace.
Everything Falls Under The Umbrella Of “Digital Assets”
Broadly speaking, everything listed above can fall under an umbrella category called “digital assets”.
Digital assets include cryptographic tokens, auditable digital currencies, cryptocurrencies, and non-auditable digital currencies (like PayPal).
Here’s a brief overview of all of the items that fall under digital assets:
Non-Auditable Digital Currency: PayPal uses a non-auditable digital currency. This is a centralized payment service where you can transfer certain digitized assets and/or currencies. Nobody can verify the database, but you trust the service based on the honesty of the company. A digital currency issued by a central bank would also fall into this category.
Auditable Digital Currencies: Auditable digital currencies are digital currencies that can’t be considered cryptocurrencies because some of the processes are not decentralized, although the database can be audited by any external party or some external parties. This is the key distinguishing feature between auditable and non-auditable digital currencies.
Ultimately, according to DistributedLab, the key distinguishing feature of a cryptocurrency is its decentralization. In order for a cryptocurrency to be considered a cryptocurrency, key mechanisms of that cryptocurrency need to be decentralized. The cryptocurrency needs to have decentralized issuance, for example, and a decentralized governance structure.
When a digital asset doesn’t have decentralized governance, then it cannot be considered a cryptocurrency. It could be a digital token or another type of digital asset – but it’s not a cryptocurrency. That’s why Ripple (XRP) isn’t a cryptocurrency.
By understanding the difference between cryptocurrencies and non-cryptocurrencies, you can better understand where our industry is going.