Cryptocurrency vs. Token vs. NFT vs. Stablecoin — Everything You Need to Know
Difference between cryptocurrency, tokens, and NFTs.
In the previous article we discussed what are smart contracts (Bitcoin vs. Ethereum or What are Smart Contracts). However, creation of tokens is arguably one of the most popular usage of smart contracts. Blockchain tokens, such as ERC-20 tokens, are often confused with cryptocurrencies; however, they are fundamentally different and serve different needs.
Cryptocurrency vs. Tokens
Cryptocurrencies act as digital money and are in the core of a specific blockchain system. A cryptocurrency can be transferred within its native blockchain system from one account to another, as well as it is used for paying a fee for initializing a transaction on that particular blockchain. For example, for a user to make a transaction in Ethereum blockchain, a specific fee in ether should be paid. Same with Bitcoin blockchain and its native cryptocurrency bitcoin.
Unlike native cryptocurrencies such as bitcoin, ether, and litecoin, a token is simply a smart contract that stores data about how many of those tokens each account has, and is built on top of an existing blockchain system. There are multiple reasons why many organizations prefer creating tokens over cryptocurrencies.
Creating a token does not require building the whole blockchain infrastructure with nodes that will process and validate its transactions. Instead, token creators can utilize features of existing blockchain systems, such as security and proper decentralization. It is not only cheaper, but also faster and easier. On top of that, creating a token on an existing blockchain system allows interaction with other smart contracts and tokens that are deployed to that blockchain. Tokens can serve for different purposes, such as representing loyalty points in an online platform, a currency in a game, a right to vote or perform other operations, and others.
The most popular token standards are ERC-20, ERC-721, and ERC-1155. We will discuss each of them.
ERC-20 Token
In its core, an ERC-20 token is a smart contract deployed to Ethereum blockchain that stores balance data and implements a set of specific functions, such as transferring tokens to other accounts, checking balance of a particular address, checking total supply of the token, and others. It is up to the token’s developer to decide how exactly those functions are implemented. However, the majority of ERC-20 tokens follow implementation proposed by OpenZeppelin.
Therefore, when sending an ERC-20 token to another account, no value is actually transferred. Instead, a query is sent to the according smart contract with the request to update stored data inside that smart contract — to decrease balance of the sender by the specific number of tokens, and to increase balance of the recipient by the same value. Also, as mentioned before, for this transaction a fee in ether should be paid.
ERC-20 is the most popular token standard and is used to create fungible tokens. Fungible means that two such tokens are absolutely equal and can be exchanged one with another without losing any value. Think about an ERC-20 token as a fiat currency, where one dollar bill is equal to another dollar bill.
Stable coins
A stable coin is simply a blockchain token (in most cases an ERC-20 or a similar standard fungible token) that is pegged to a fiat currency. This means that the stable coin’s value always remains the same relative to the pegged currency.
For example, the most popular stable coin is USDT or Tether, and its value is always equal to one dollar. A company issuing that token is responsible to keep the token’s value fixed through different mechanisms. For example, by balancing the outstanding supply of the tokens based on demand for that stable coin on different exchanges. Stable coins take an important part in blockchain ecosystems, which can be judged by the fact that, at the moment of writing this article, USDT stable coin alone has a market capitalization of around 80 billion US dollars. Other popular stable coins are USDC, DAI, BUSD, and others.
ERC-721 vs. ERC-1155 Tokens or NFTs
Unlike ERC-20 tokens, every ERC-721 token is unique and is only one of the kind. One ERC-721 smart contract can have a certain amount of IDs, where each id represents a single unique NFT (non-fungible token) that has an owner.
Another standard for non-fungible tokens, ERC-1155, on the other hand, is a mix between ERC-20 and ERC-721 standards. ERC-1155 allows having multiple fungible instances for every class of non-fungible tokens.
Since ERC-1155 token standard is particularly popular in gaming, it will be easier to explain its concept on a gaming scenario. From the example of the diagram above, we can see that there are three different non-fungible groups of tokens (classes) that are stored in a single ERC-1155 smart contract. Namely, gold, silver, and a diamond sword. There are 100 and 500 instances of gold and silver, respectively, while there is only one diamond sword. Therefore, ERC-1155 allows to combine fungible and non-fungible tokens in a single smart contract, which, in fact, is very convenient from the development point of view, as well as the gas consumption and load on the network.
Keywords: Blockchain, cryptocurrency, decentralization, Bitcoin, Ethereum, smart contracts, tokens, NFT, stablecoin, ERC20, ERC721, ERC1155.
