Cryptocurrencies have entered the mainstream. The opportunity to get rich through investment was not just the subject of rap songs. Social networks are also full of questions about “which coin is worth the most right now”. This sentiment in the market means that cryptocurrencies are valued primarily based on market capital. Consequently, newcomers are wondering if Ethereum/Ripple/Cardano/Solana could soon replace Bitcoin.
This article is less about defending Bitcoin and more about raising awareness of the cryptocurrency in question. After all, individual cryptocurrencies, various ICO-funded projects, and new hard forks are not simply about creating a token for staking. If that were the case, we would be in the much-cited bubble, because then all the projects would be worth nothing.
Of knives and saws – coexistence of different use cases
In the course of the significant increase in the price of Ethereum, the buzzword “switch” has come up again and again in recent years: people were convinced that Ethereum would soon have a higher market capital than Bitcoin. Some circles also went so far as to say that Ethereum would be “the best Bitcoin”. It is often forgotten that different cryptocurrencies are often designed for different use cases.
Ethereum impresses with the possibilities of smart contracts: With the help of smart contracts on a blockchain, not only automated processes are possible, but also decentralized applications, the processing of which can be observed during runtime. The classic idea of open source has been expanded to include the idea of open execution.
One can imagine that smart contracts greatly extended the idea of classic blockchain technology, as it is known in the case of Bitcoin. Consequently, many more applications than a peer-to-peer currency are conceivable. With the Initial Coin Offerings (ICOs) described below, such an application has received a lot of feedback.
In short, one might think that Ethereum is better than Bitcoin, after all, Ethereum is much more possible. However, is it always better when many use cases are supported?
As a parable, the pocket knife could be compared to a saw: a Swiss pocket knife also contains a saw. Like Leathermen, these knives are tools that can come in handy in a variety of situations, and often fit in your pocket.
But although knives combine the functions of screwdrivers, pocket knives, saws, bottle openers and can openers, these tools have not disappeared from the market because they are an adjunct for special applications and not a replacement.
The same can be said for Ethereum: Ethereum does not compete with Bitcoin, but rather complements the ecosystem of blockchain technology. Consequently, both currencies can co-exist beautifully.
Currency and tokens – ça fait deux
If monetary value is primarily considered and all investments remain on exchanges, the difference between cryptocurrencies and tokens becomes blurred. Coinmarketcap also displays tokens along with cryptocurrencies on the default screen. However, tokens are listed as such on Coinmarketcap and “coins” and “tokens” can be viewed separately. The difference is important, as it can also help with the fundamental evaluation of an investment and with the technical classification of a project.
We speak of a cryptocurrency when it is an independent solution, that is, when it is a separate blockchain or a data structure similar to a blockchain. The protocol underlying these cryptocurrencies may be based on another cryptocurrency, but the previously existing cryptocurrency is just a model to follow. To put it more concretely: Litecoin or Bitcoin Cash can exist independently of Bitcoin, on whose code both protocols are based, and do not require Bitcoin. An ecosystem of nodes, miners (if a consensus is found on the basis of proof of work), developers and regular users is formed around individual cryptocurrencies.
Tokens, unlike cryptocurrencies, cannot exist without an underlying cryptocurrency. For example, they exist on the Ethereum blockchain and cannot exist independently of it. The great advantage of tokens is that they do not require a new infrastructure with its own nodes and miners. They are also much easier to generate than cryptocurrencies.
This simplicity also led to tokens being offered for ether as part of ICOs (Initial Coin Offerings). In this way, the project can quickly receive financial support from anywhere in the world. Some of the tokens are implemented in such a way that they contain the necessary functions for the intended project, often the investor only expects to make a profit after selling them on one of the many crypto exchanges.
Whether it’s cryptocurrency or token, always look at the technology behind it.
Questions about whether Ethereum or other cryptocurrencies or tokens will ever be worth more than Bitcoin minimize the technical possibilities that blockchain-based cryptocurrencies bring with them and make the difference between proprietary cryptocurrencies and tokens blur.
The above paragraphs are by no means a reproach, but rather serve as a safeguard: looking only at money, valuing cryptocurrencies only based on a technical analysis of chart movements, there is a very good chance that projects will receive extremely bad. valuations. If that happens, one would eventually learn that the emperor is naked and blisters would develop. The good news is that the investors themselves, if they are critical in their investment choice, have it in their hands that it does not come to that.
This article was previously published in January 2018. It has been revised and updated for republishing.
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