Episode 10 – Back to Basics – Different Coins on the Block
At the end of last episode we promised to shine a very bright light into the furthest corners of the cryptosphere. With just about as many altcoins as there are stars in the sky, what’s the point of all of them? Are they all serving different use cases, or just trying to do the same thing but better?
Well, that’s what we’re here for. Illumination.
Welcome to School of Block.
Welcome to the startling galaxy of coins that is crypto. There are more and more everyday adding greater and complexity to what’s possible with a simple token but for now we really just need to zero in on 3 specific types which we’ll be covering in depth in this episode: protocol coins, utility tokens and stablecoins.
Let’s start at the beginning. And when it comes to blockchain, that means Bitcoin. And yes, bitcoin *is* designed to be a form of money. In episode 6 we talked at length about how a blockchain works – but fundamentally with a protocol like Bitcoin’s, the coin itself is used to secure the network.
What does that mean? That the miners are incentivized to support the network, as mining itself and facilitating transactions via the consensus mechanism means they earn more bitcoin.
Bitcoin can be considered a ‘PROTOCOL COIN’, as can others such as Litecoin or Monero – all created to act like money, representing a unit of account, store of value and medium of transfer.
But not all coins are designed or intended to be used in this way. UTILITY TOKENS, for example, provide users with a product and/or service. These tokens usually act as an access point into a network. Without a utility token, you can’t access the services available on that platform. They may also give you the opportunity to vote on how the network is run. Examples include Filecoin, Civic and Chiliz.
The most popular example of utility token is the ERC-20 Ethereum standard. Now this is where it could get a bit confusing, but stay with me….
Ethereum itself is a PROTOCOL COIN, but it also acts as an application layer. The smart contracts that run on the platform enable you to issue your own tokens that exist on top of the Ethereum infrastructure. Anyone can do it, it’s not technically difficult – and this is one of the reasons why we saw the almost CAMBRIAN EXPLOSION of altcoins in 2017. Ethereum isn’t the only coin that functions like this – other examples include Cardano, Solana and Tezos.
The Ethereum ERC-20 standard made it possible for hundreds, if not thousands, of projects to launch – but transactions with utility tokens on the ERC-20 platform require a small amount of ethereum to power them, so if you’ve got a wallet with some MANA in it, you’re also going to need some ETH in there before you can make any transactions. And with gas fees where they are right now, if you’re a Decentraland developer that might not be something you’re too happy about.
This ‘Cambrian Explosion’ was a necessary part of crypto evolution. Not all of these projects will make it to maturity, but, much like in mother nature, the strongest will survive – probably going on to launch on their own mainnet. And why would they want to do that? Because then that token will have control over its own ecosystem and rewards.
What else can you build on a platform like Etherium? DECENTRALISED APPLICATIONS, or dApps. dApps create value by facilitating access to protocols or services, and end users pay transaction fees for this convenience. Examples include Upland and NBA Top Shots.
You might have also heard of the recent hype around DeFi, or DECENTRALIZED FINANCE. Essentially its a sub category of dApps that allows peer to peer lending and borrowing, the majority of these tokens run on Ethereum and have their own utility tokens (allows users to pay for the service), they have driven a huge increase in use of the network- which some would argue has shown the limitations of the network. Aave, Yearn Finance and Uniswap all exist inside the DeFi space, along with many, many others.
One huge part of the crypto space we’ve not mentioned yet – STABLECOINS. They’re frequently built on top of existing protocols. Coinbase’s offering, USDC was created on the ethereum blockchain and is ERC-20 compatible, in order to support rapid transfers of USDC on the ethereum network. And our old friend TETHER was in fact built on top of bitcoin, via the Omni Layer Protocol. So whilst stablecoins can be classed as ‘money’ they don’t necessarily have networks of their own like PROTOCOL COINS.
There’s one final distinction to make. And that is FUNGIBLE vs NON FUNGIBLE. We introduced this concept back in Episode 3. But basically if something is fungible, every individual unit of it is mutually interchangeable. Great for units of account like MONEY. So coins like BITCOIN, ETHEREUM and so on are designed to be fungible.
But some tokens aren’t. They’re called NON FUNGIBLE TOKENS. And artists, musicians and celebrities are piling into the NFT space. Why? Because something that isn’t interchangeable with everything else is UNIQUE, and that uniqueness can bring value. So with an NFT you can have an original artwork, limited edition album or set of trading cards – all digital and all with certifiable provenance. NFTs are pretty damn hot right now, so we’ll be doing *our* due diligence and covering that in our next episode.
You’ve been watching School of Block, presented by Ledger and the Defiant, demystifying decentralisation, one block at a time. Don’t forget to subscribe, drop us a like if that’s what you’re into, and as always – here’s to your financial freedom.
Wow. What is all this? Bitcoin, Litecoin, USD coin.. why do they all end with coin, why so many options, how do they differ? How do I know which ones are legit? And why do they have dogs on this menu? Ughh, no, I can’t take this, it’s too much.”