Take the case of Bitcoin, which is the most widely used cryptocurrency today. The idea was to create a currency governed by its users with transparency in each transaction. What makes it different from traditional currencies? Can we really talk about money?
In order to define a crypto-currency, let’s go back to the fundamentals of a traditional currency. We recognize a currency when it fulfills these three functions:
- Unit of account: a currency must make it possible to assess the value of a good or service through a price. This is the case with Bitcoin today with which you can buy products and services. This purchase price gives Bitcoin its legitimacy as a unit of account.
- Medium of exchange: it is a question of making possible exchanges which would be too complex with simple barter. Many merchants accept the use of Bitcoin as a currency of purchase.
- Store of value: a currency must allow the accumulation of capital, and therefore savings. Thus, it must be stable enough to avoid losses or increases in value that are too unpredictable. Institutions (such as central banks) control this stability and regulate fluctuations in order to avoid excessive inflation or deflation. Bitcoin is still experiencing significant fluctuations but these will stabilize over time as a maximum of 21 million units will be issued, making this cryptocurrency limited.
Unlike traditional currencies, Bitcoin is digital and decentralized. That is to say, it uses cryptographic algorithms and has no organization or institution to ensure its regulation. Each exchange is based on a peer-to-peer network without going through a third party of trust, thus guaranteeing a high level of security in the transfer of data. Indeed, a cryptocurrency is generally based on the public blockchain system. Thus, the database is transparent and each piece of information entered cannot be modified or falsified. In addition, since each exchange can be publicly viewed, there is no need for an intermediary. This is where cryptocurrency draws all its strength: the decentralization of its exchanges. The State and financial institutions no longer have any impact on it. Since the price of Bitcoin is no longer modified by external factors, only the supply and demand of users ultimately influences it. This means that this decentralization leaves the users of the cryptocurrency the power to influence its price, without worries of trust. As part of the ecosystem of a blockchain, this of course requires a network consensus: the volatility of the currency is thus reduced and Bitcoin can be traded internationally.
This virtual currency can be bought or sold via trading platforms such as Binance or Coinbase for example. These “coins” can be mined as explained previously by people who participate in feeding the blockchain algorithm. Do you remember the white pages to seal with a key and the process of mining that key in order to get portions of Bitcoin if you find it? This is how people acquire cryptocurrency thanks to their time (and their powerful computers…).
However, cryptocurrency is not the only crypto-asset out there! While coins use their own blockchain, tokens use a coin’s blockchain. The most used tokens today are based on the Ethereum blockchain. These tokens generally cannot be mined.
The different types of tokens:
Contrary to what one might think, tokens-values, or security tokens, have no common characteristic with the possession of a debt security or shares in a company. Indeed, these tokens:
- Have a value that depends on the work done by the issuer
- Offer neither guarantee of achievement of objectives nor guarantee of value
- Are useless until the objectives are achieved
- Do not confer any rights on the decisions of the issuer
In summary, these tokens allow you to invest money in an asset with the ambition of seeing its value increase in the future. But just because you own security tokens from a company, for example, does not mean you can attend their general meetings.
Unlike security tokens, equity tokens (or title tokens) give their holders real rights and duties. It is therefore company shares transposed on a blockchain.
What is the difference with classic titles? When you buy a security, the company shares thus acquired rest on an account in your name with your bank. Equity tokens allow these securities to be placed directly in the buyer’s wallet, rather than at their bank. Their main advantage is to allow decentralized and fast exchanges anywhere in the world, without intermediaries.
According to some, the term security tokens also includes equity tokens… So be careful of the context!
Utility tokens have a completely different function: they allow access to a product or service. Its price varies according to the estimated value of what you want to buy, so there is some speculation as to its estimate. These tokens are mainly used by companies that want to increase awareness of their products or applications. The availability of these tokens is limited: the value of the token therefore increases with demand. This is the case with DApps for example, with scalability that increases the value of the token used. Many platforms allow you to use them. These utility tokens are based on a blockchain, like that of Polygon, which is one of the most used for this type of token. It is also on this blockchain that POXO, the token of our Sparkso project, is based. Utility tokens also allow, among other things, to raise funds for start-ups: the investor buys tokens which will allow the use of the services of the app in the future, while the company collects liquidity to help it in its development.
Payment tokens are simply the use of cryptocurrency as a means of payment. Many merchants now accept this means of payment, which is becoming more and more popular with the appearance of bank cards, or even dedicated accounts. The user no longer needs to have an account in a banking institution to be able to use his coins and buy goods or services. Companies like Paypal also allow you to directly convert your virtual currency into dollars or euros to pay for your purchases with your Bitcoin or Ether wallet.
- Non fungible token or NFT
An NFT is a token that is not interchangeable with another same type of token, certifying thus the authenticity and the ownership of a digital asset or a digital right. NFTs are mainly located in the Ethereum blockchain ecosystem. Today, many works of art have been certified in NFT, as have professional training.
In order to use all these tokens securely in a blockchain, smart contracts are created to allow automated and decentralized exchanges: these are smart contracts.