Understanding Digital Assets: How Cryptocurrencies, Tokens, and NFTs Differ

@andreydidovskiy

Digital Asset Investor & technology connoisseur laser focused on bringing incredib...

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Long being an umbrella term to refer to all types of blockchain-based digital assets, crypto, has served an excellent role in helping root the public consciousness around this new economic sector and formulate a distinguishment from traditional instruments of value.

However, as the industry grew beyond cypherpunks and began to integrate itself into multiple facets of the greater global economy, transforming into what is now referred to as Web3, the term “crypto” has begun to fall short in its ability to classify the three archetypes of digital assets.

Today, if you open any listing site/directory (such as coinmarketcap or coingecko) or listen to most podcasts, you will notice that the terms coin and token are used interchangeably. This is not wrong and conversationally it is ok to comingle the two, but it is just not technically accurate and might cause confusion for the uninformed.

As we prepare for the next influx of users, we must polish the intellectual infrastructure to educate and help guide them in navigating this extremely innovative and iterative wild west.

Let's dive in!

Crypto is an abbreviation of the term cryptocurrency; the key here being the “currency” part. By definition, currency is a stone's throw away from money, and money is defined by the presence of three characteristics:

1. Store of Value
2. Medium of Exchange
3. Unit of account

Fundamentally, all on-chain assets are cryptographically secure digital units of account, that represent some abstract form of value. However, the vast majority of these digital assets do not by any means qualify as a currency.

There are two categories of three digital asset archetypes, Coins, tokens, and NFTs. The tricky part in separating them is the semantic use of tokens. ‘Token’ is an extremely broad term. NFTs are tokens. Tokens are tokens. Coins are tokens. But they are all different.

The best way to express the differences between them all is through examples.

Cryptocurrency — Coins

The “purest” form of a digital asset.

Cryptocurrencies are digital coins that are natively imbued into the base layer functions of a network. They inherently possess all three characteristics of money and abide by their own unique monetary policy (dictated by the consensus logic of their underlying network).

Coin's predominant use cases are accounting/paying for the utilization of their underlying network. Basically, in order for an asset to qualify as a cryptocurrency it must have its own dedicated blockchain/network.

It is this category of assets that acts as vehicles for the establishment of a decentralized ecosystem. Surely, a network can operate without the presence of a crypto asset, however, it is due to the presence of the coin that we can create a fair incentive model for distributed computing.

It is important to identify where coins draw their value from.

As redundant as this may sound, all pricing/value boils down to the fundamental economic principle of supply and demand.

Supply aside, coins accrue value from the open market demands for utilizing its network.

The role that coins play on their networks can be split into two categories:

1. They are sybil mechanisms that protect the network from spam. Networks that are free to use are constantly subjected to abuse from empty/low-value transactions that take up processing power and clog up the servers. With the presence of a coin, the costs associated with acquiring them deter value-less activity.

2. They are an incentive model for creating digital pubic goods infrastructure. Blockchain networks require nodes that handle computation to secure the network since governments won't subsidize such activity. By having a coin present, independent operators become interested in contributing as a node to collect proceeds. These proceeds/incentives come in the form of block subsidies and transaction fees.

Examples of Coins: Bitcoin, Ether, Doge, Solana, Litecoin, Stellar, Tezos.

Tokens

Applications that are built on top of base layer networks.

This is a more abstract speculative association of an asset.

While it can be argued that this category of digital assets can also replicate the three primitives of money, tokens are fundamentally different from coins based on their degree of separation from the underlying network.

Tokens are fungible assets that are issued on top of existing networks through smart contracts, ultimately forced to pay network fees in the asset of their deploying chain. So, in order to create and use a token users must still acquire the network's coin.

This is commonly seen with startup applications that run on Ethereum. If a user owns a token on the Ethereum network (such as USDT, USDC, or UNI) they are unable to transact in that token without spending ETH.

Characteristically, tokens can take on any use case that is ascribed to them by their issuing parties. Paying for access to an application is the most intuitive use, however, more exotic forms such as being tools to participate in DAOs, bonding/staking them to investment products for the generation of yield (providing liquidity), or the more fringe uses as mechanisms to counter-balance the issuance and price pegs of a stablecoin (rip Luna) have been implemented.

Examples of Tokens: UniSwap, The Graph, AAVE, Render, MakerDAO, Compound.

NFTs

Non-fungible tokens.

The hype of 2020 that broke the camel's back.

This is perhaps the most misunderstood type of asset of the three.

It is astonishing how people seem to be oblivious to the fact that NFTs are the same in nature as regular tokens.

The degenerates and bots that are running rampant across crypto Twitter continuously refer to NFTs as if they were a radical new technology that is so damn different from everything else that it deserves its own INDUSTRY. No. NFTs are not an industry… They are a technology that can be applied to other industries.

What sets NFTs apart from the preceding two archetypes is their unique non-interchangeable property. Whenever thinking about NFTs just imagine a family of people that are all related by blood but are obviously different in their fingerprints.

This class has immense potential in allowing us to create new, interesting solutions for genuine problems. Supply chain provenance, digital art, digital identities, and exclusive community access, among others, but they themselves (NFTs) are absolutely nothing special.

This is a wake-up call to everybody, NFTs are just another form of tokens, that are non-fungible (it’s literally in the name).

Examples of NFTs: Azuki, Degods, Moonbirds, Otherdeeds, Mad Lads.

As always, thank you for reading.

I hope this serves you well on your journey through the burgeoning internet of value.

Live Long and Prosper ??

Anybody who is looking to get involved in the space or is building something and would like to chat, I propose to you, my friend:

“Lets Find each other and do something great together”

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