It is often the case when talking about tokens and cryptocurrencies, these terms are associated with volatility and speculation. However, blockchain technology underpins assets transactions and provides a very secure and reliable environment. Next, tokens functionality will be explained and the way it differs from a cryptocurrency.
Blockchain is the basic technological infrastructure that makes it possible to register and issue tokens, record transactions, assets, rights, identities, or atomically execute transactions when certain conditions are met.
This technology is characterized by being decentralized, i.e. the authenticity of transactions is carried out automatically according to the defined encryption, bypassing trusted third parties (banks, notaries, etc.) who, in a centralized manner, validate the operations.
Another feature is records immutability, which are encrypted and tied to other transaction blocks, where each network node has a copy of the record history. All these virtues are transmitted to the different use cases based on this technology, such as tokens, cryptocurrencies or other operations encoded in smart contracts.
A contract in the traditional sense is an agreement between two or more parties to do or not to do something in exchange for something else. Each party must rely on the other to fulfil its obligation. Smart contracts are a type of encryption that represent agreements to act or not to act, eliminating the need for a trust agent between the two parties. This is because a smart contract is defined and executed (or enforced) by a code, automatically without any third party discretion. In fact, the three elements of smart contracts that distinguish them are autonomy, self-sufficiency and decentralization.
Like any other asset, a digital asset is an intangible good or right that exists only in digital form and provides a benefit to its owners. These assets are characterized by the format in which the data representing them are stacked, the way they are displayed, or their usefulness.
A token is a digital asset or unit of value that can be registered, stored and exchanged in a blockchain system. It has an alphanumeric format that is regulated by smart contracts and enjoys all the benefits or rights conferred upon it. Within the token category we find the cryptocurrencies with or without backing/collateral detailed below.
A cryptocurrency is a type of token that is considered as a digital asset, which uses cryptographic encryption to guarantee its ownership and should in principle fulfil the three functions of any currency, namely medium of exchange, store of value, unit of account.
It is supposed to have an intrinsic value, unsupported by other assets, hence its high volatility, as can be observed in bitcoin or some other altcoins. The higher volatility, in turn, makes it difficult to use it as a means of payment or as a store of value, so its functions as a currency are questionable.
The name “crypto” derives from an advanced technique, cryptography, which ensures the authenticity of digital assets and eradicates forgeries in the block chain.
Cryptocurrencies include stable cryptocurrencies, which are backed by an asset, such as currency (dollar or euro), gold, or some other tradable asset or commodity with a stable price, hence the name “stable cryptocurrency”. A variant of stable cryptocurrencies are unsupported or uncollateralised cryptocurrencies, which maintain their price thanks to algorithms that prevent their fluctuation.
Asset tokenization is therefore a process by which a token is assigned ownership rights or benefits over a physical asset or ongoing project. For example, real estate tokenization involves transforming real estate investments into tokens (unit of value), which is then converted into a digital asset.
Unlike non-collateralized cryptocurrencies, as there is a real estate asset that is the underlying asset that gives the token its value, the price is much more stable.
The difference between a collateralized token and a cryptocurrency is mainly that the token has a backing in the real economy, while the cryptocurrency is supposed to have an intrinsic value.
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