Ethereum Tokens vs. ETH Currency

July 30, 2017

“The quickest way to destroy a civilization is to take away their money.”

  • Capitalism and Freedom, Milton Friedman 1961, paraphrased

Please note that this is an opinion piece for information purposes only and not be taken as financial advice.

The Low Down

Ethereum is a decentralized platform, with it’s own blockchain and Ethereum’s “coin” or better put currency is called Ether. (But you already knew that 😉)

Ethereum is similar to Bitcoin in that Bitcoin also uses a blockchain data structure, however, the Bitcoin ecosystem has it’s own currency called Bitcoin.

The confusion comes in with tokens, especially as of late in the ICO craze.

Tokenize The Things

A “token” by definition is a representation any fungible tradible good such as currency, loyalty points, gold certificates, in game items and more.

The idea of a token itself is niether exclusive to Ethereum nor any other platform.

A token is really an abstraction.

It represents that, “I own a underlying tradable asset.””

Currently the Ethereum space is very hot with ICOs which are really just token offerings with some sexy IPO marketing language. The most interesting use case of these tokens (as mentioned in Nick Tomaino’s On Token Value Post) are the usage token. These tokens represent an exchange medium for access to a digital service within a project.

For example, The Golem Project (the worldwide supercomputer) pays app developers who publish on the platform as well as CPU resource renters in their token GNT.

GNT represents the internal medium of exchange in the golem project, and people who want to participate in this ecosystem must have GNT to transact (ie. Use CPU resources, publish an app, etc).

If someone wants to buy GNT but only has ETH, they can offer to trade their currency ETH for my GNT at a price in a bartering like fashion. For example if someone were to offer you an exchange rate of 1 GNT per 0.01 ETH.

Explain Like I’m Five

Lets think about usage tokens in a more “real life” example. Its late on a Friday evening and your feeling the itch to play some pinball. So you hustle your way down to the local arcade and find a pinball machine. 😎

In order to participate and play the pinball game you must exchange your fiat currency (USD/CAD) for a 3 pinballs (usage tokens) to engage in the service (competing in pinball for a highscore).

By similar analogy to this pinball example, we purchase usage tokens using cryptocurrency (or fiat) to engage in different digital services in the blockchain project ecosystems.