Ethereum (ETH) is the second most popular cryptocurrency on the market, right after Bitcoin (BTC), and it is especially popular among software developers, web developer startups, and entrepreneurs. The reason for this is the flexibility, multifunctionality, and liquidity offered by the Ethereum blockchain that enables people to do much more than just use Ether as means for financial transfers.
The founder of Ethereum, Russian programmer and crypto enthusiast Vitalik Buterin, wanted to create a fully decentralized, flexible digital ecosystem with its own cryptocurrency, independent of any central authority, bank, or government institution. The Ethereum network has achieved all of the above-mentioned thus far and enabled people to create smart contracts, decentralized apps, and Ethereum-based tokens for various purposes.
Let’s take a detailed look at the differences between coins and tokens, how the BTC and ETH blockchains are different, and then go over the various sorts of Ethereum tokens.
Crypto Coins vs Crypto Tokens
It is a common mistake to refer to cryptocurrencies as both coins and tokens. Many people think that these two words are interchangeable when it comes to digital currencies, but they have quite a different meaning.
Crypto coins are digital currencies built on their own blockchain networks independently of any third-party authority. Their blockchains are entirely the result of the work of the developer team behind a given crypto. Bitcoin and Ethereum are the most well-known blockchains on the market.
Coins are mainly a means of facilitating financial transactions between individuals and companies, utilizing the advantages of their blockchains such as lightning-fast transfer speed, high security, and reliability. Coins can also be used as a store of value, which is a really common practice, especially with highly valued coins.
You can basically use crypto coins just like fiat money, but the difference is that these coins don’t physically exist. You can’t put them in your wallet and they only exist on their blockchains. Crypto wallets are used for storing private keys that act as passwords which enable you to access your coins and use them as you like. All in all, cryptocurrency coins are best described by the term futuristic money, since digital assets are becoming increasingly popular, with the market caps of various cryptos, especially BTC and ETH, constantly on the rise.
Cryptocurrency tokens are different from coins in the sense that they don’t have their own blockchain. Tokens are built on already existing blockchains of reliable cryptocurrencies that allow the implementation of various software features through their blockchains, like the Ethereum network. A crypto token utilizes the blockchain’s functionalities to facilitate smart contracts, the creation of decentralized apps, facilitate transactions, and other useful options with everyday use cases.
Ethereum is definitely the most popular blockchain when it comes to creating tokens. Developers like to build their tokens on the ETH network because the programming languages offer high flexibility and top-notch security, so you needn’t worry about potential cyber attacks.
Also, thanks to the decentralized nature of the ETH network, you don’t need any special clearance to create your custom tokens on the blockchain. Anyone can do it using the technology provided by the platform. You just have to learn the basics of the ETH programming languages and you are free to use the advantages of the ecosystem and create your tokens for your web platform, application, or business.
How Does the Bitcoin Blockchain Work?
In order to understand the key difference between the BTC and ETH blockchains, we first need to take a quick look at how BTC works. Bitcoin is the first cryptocurrency in the world, launched in 2009 by the mysterious Satoshi Nakamoto after the publication of the BTC white paper. The currency was created as the first digital cash which aimed to provide people and companies with a means of decentralized payment, financial transactions, and store of value.
Over the years, the popularity of Bitcoin skyrocketed, mainly thanks to the highly advanced blockchain technology it employed and still continues using with very few changes. The BTC blockchain was (and is) so secure and reliable that it served as the main inspiration for altcoin developers that based their own blockchains on the original Bitcoin network.
The way the BTC blockchain works is relatively simple. The network is made out of data blocks set in chronological order as a chain. Each block houses 1MB of transaction data and in order for a new block to be generated, all of the transactions in the current one need to be verified by system nodes and approved as legit transactions. System nodes are actually miners with their computing power that are constantly solving mathematical puzzles and tasks, which verify transfers in the process based on the proof-of-work algorithm.
Proof-of-work is a method used by the system nodes to verify that every transaction is legitimate. Multiple, independent miners have to confirm that a transfer is legitimate and this usually takes between 5 and 10 minutes. When a transfer is verified and a new block is added to the blockchain, miners get their reward in the form of newly mined bitcoins, or rather, fractions of a Bitcoin.
How Does the Ethereum Blockchain Work?
The Bitcoin blockchain process is fairly similar to the Ethereum blockchain, except for a couple of key differences. The Ethereum network uses GAS tokens to pay for transaction fees while Bitcoin fees are paid in BTC, or rather in its smaller denominations—satoshis. The GAS token acts as a medium for facilitating transactions on the ETH blockchain.
The block size which is strictly defined in the Bitcoin network as 1MB of data per block is undefined within the Ethereum network and fluctuates based on the average traffic and network usage. Also, the confirmation time for a transaction is far lower with as little as 15 seconds for an ETH transfer, compared to the 5 to 10 minutes of BTC.
All of these differences are important, but the final difference is the key reason why Ethereum is great for creating various sorts of tokens on it: unlike the BTC blockchain, Ethereum enables users to do much more than just transfer funds. People can conduct smart contracts and automated programming procedures (for DApps) with advanced computing and coding languages facilitated by the ETH network and protected by its blockchain technology.
These features make ETH a great choice for creating flexible tokens that carry crucial programming data.
ETH Network Key Characteristics
We mentioned that Ethereum is a great network for developers and programming. Let’s take a look at what these key characteristics and options are, and why they make ETH so attractive and flexible.
One of the key features of the Ethereum blockchain that makes it much more than just a digital currency is the ability to conduct smart contracts. Smart contracts are self-executing, automated agreements between two parties written with lines of code. The content of a smart contract exists within the Ethereum blockchain, which is a decentralized, distributed network with no central authority.
These smart contracts are conducted directly between the interested parties, without any central authority or institution approving the contract. The two parties can make any type of agreement and they don’t answer to anyone except each other, abiding by the terms of the contract they mutually agreed to.
The code of a smart contract controls the execution of the agreed-upon operations and makes sure everything is in order. These contracts are extremely useful in web development and the development of apps, and have valuable real-world use cases, such as using a smart contract to automate payment processes in a startup company or run a schedule of operations for a web platform. Smart contracts are also used in various financial services because of their capability to automate complex transactions and ensure things run smoothly.
One of the best things about smart contracts is that the blockchain system makes sure no one can pull a scam on the other party in the contract because once the code of a contract is written and verified by the network, none of the involved parties can skip out on their end of the deal.
Decentralized Applications (DApps)
Decentralized Applications (DApps) are one of the key advantages that the Ethereum network offers developers with the help of smart contracts. DApps allow the highest possible autonomy for both developer teams and users when creating and using apps, independently of large, commercial web services with centralized data storage and management.
Ethereum program languages such as Solidity make it possible for developers to create all sorts of web platforms and apps that don’t use or store visitor data and aren’t tied to centralized web services such as Google or Facebook. This means that DApps enable increased privacy without sacrificing the quality of services. Centralized apps store user data on company servers which are prone to cyber attacks and it isn’t uncommon for these servers to get compromised every once in a while. With DApps, there are no such issues.
DApps have endless possibilities for real-world use cases, from culture-related platforms to music services and financial applications, everything can be done using smart contracts and developing the end product as a decentralized application. Some of the most famous DApps are Uniswap and Oasis digital asset processing programs, and decentralized crypto-friendly browsers such as Brave. ETH has its own platform, the Ethereum Virtual Machine (EVM) that enables developers to create DApps and test them in a safe web environment.
Decentralized Finance (DeFi)
DeFi, or decentralized finance is an innovative way of facilitating financial operations without the involvement of banks, state institutions, government agencies, and other unnecessary intermediaries. The Ethereum network is ideal for decentralized finance since it enables lightning-fast transactions through the blockchain—exactly what DeFi is about.
Smart contracts are an integral part of DeFi which give Ethereum an advantage over numerous other cryptos because they enable much wider financial operations than just transactions of funds. The possibility to schedule and automate payments is an example of advanced DeFi, which is possible thanks to smart contracts.
In the world of business and finance, centralization is a huge obstacle for getting things done fast because of the paperwork and bureaucracy generally involved with business transactions and contracts. DeFi symbolizes the future of finance and utilizes blockchain technology to make (any) business run smoother and faster without compromising security and reliability.
Ethereum Token Standards
The Ethereum network allows people to tokenize assets and create custom tokens for their startups, businesses, web platforms, and apps. The advantages of the ETH blockchain that we have already described are a magnet for crypto enthusiasts that wish to use reliable and secure technology in their personal business endeavors.
Ethereum tokens have different token standards that have various features. All ETH-based tokens are ERC which means Ethereum Request for Comments. These ERCs are actually application-level standards that can include different types of data. ERCs can contain token standards, programming data packages, application codes, and other types of information, depending on what they’re used for.
Let’s take a look at the two most popular ETH token standards, ERC721 and ERC-20, along with other, less popular ones.
ERC721 is the Ethereum token standard for non-fungible tokens (NFTs) built on the ETH blockchain. Fungible tokens are all tokens that aren’t unique by any measure, are identical to many others and thus exchangeable like any other cryptocurrency. Every USD or EUR paper bill is fungible since it can be exchanged for another bill of the same currency and doesn’t have any characteristic that makes it unique.
Non-fungible tokens, on the other hand, are totally unique because every one of these tokens is special and there are no two same NFTs. The ERC721 standard enables absolutely anyone with basic ETH blockchain knowledge to create a new token and tokenize assets associated with the token.
These ERC721 tokens can be used for various purposes such as ownership representation over assets like real estate, artwork, and unique digital collectible assets.
CryptoKitties is one of the most famous ERC721-based web projects that gained major popularity in 2017. It is basically an online game that allows participants to breed and take care of virtual cats. Every cat is a unique ERC721 token, thus making each of these kitties fully unique and irreplaceable.
ERC-20 tokens are the most popular native tokens of the ETH network. The standard for these tokens was developed in 2015, soon after the launch of the Ethereum blockchain by Vitalik Buterin, the founder of ETH.
This token standard is immensely popular because it allows the design and use of tokens that can be used by other apps, thus providing the platform for the creation of various digital currencies that are actually tokens based on the ETH blockchain. The ERC-20 standard is widely used for creating custom tokens in user wallets and decentralized exchanges. It is also a popular token for initial coin offerings (ICOs) because of its flexibility and high-quality software solutions thanks to the ETH blockchain.
Popular ERC-20 tokens include Binance Coin (BNB) and 0x (ZRX), both of which are tokens with market caps in the hundreds of millions of dollars.
The ERC223 standard is very similar to ERC-20 tokens but it has some additional options that make it more versatile. If you send an ERC-20 token to a smart contract that isn’t designed to work with the ERC-20 standard, then your tokens will be lost and you won’t be able to use them anyway, you will simply lose them.
This is where ERC223 fixes the issue because it uses a special method called token fallback that acts as a safeguard from sending tokens to incompatible contracts. This added function makes sure that when you accidentally send your tokens to an incompatible address, they are saved and not lost, effectively banning you from sending them to inappropriate contracts.
ERC777 standard tokens enable advanced programming features such as sending tokens in the name of another address, and it also gives users more control/sending options than the usual ERC-20 tokens.
The ERC1337 token standard is used to manage recurring subscriptions on the ETH network. It allows user wallets to facilitate recurring payments and other financial transactions, making these tokens great for DeFi operations.
This token standard is actually used as an interface for managing different types of ETH tokens within a single smart contract. You can include different tokens such as ERC-20 and ERC721 in one smart contract and use the ERC1155 standard to manage these tokens easily within the contract.
A Few Words Before You Go…
The Ethereum blockchain revolutionized the cryptocurrency market when it was launched in 2015 because of all the advanced computing options it brought users – apart from using ETH just as a digital currency. These are the core functionalities of ETH and tokens based on its blockchain that enable developers and companies to facilitate financial operations and create apps in a reliable, decentralized, and secure manner.