Types of blockchains, coins, tokens- why should you as an investor care?
Before we move on to practical aspect of buying blockchain assets, it is important to clarify some important concepts related to that field. I believe that many people try to enter this space as investors without first trying to understand what is it exactly? The whole field may seem confusing and technical, but in fact anyone who is willing to learn may quickly get the helicopter-view on blockchain. The purpose of this series is to walk you through these concepts before moving to practical steps such as how to create your crypto-wallets. In the 1st article of the series, I have posted recommended videos that explain what DLT and blockchain are. As an investor, how can you enter the blockchain space? It is important to understand that blockchain is a technology. It’s like cloud computing: you cannot buy cloud computing concept, but you may buy shares of Amazon, Microsoft (the company behind Azure) or Claudera, just to name a few companies that utilize cloud computing technology concept and package it into solutions for customers. If this example is far from your expertise, think of Internet: you can buy shares of companies that provide internet to their customers, or shares of Alphabet: company that deployed so many useful services on the internet.
Permission-less and permissioned blockchains
You already know that Blockchain is a type of distributed ledger technology. There are also many types of blockchain protocols that are available for developers, investors and institutions.
In this section I would like to draw your attention to one important distinction- permissioned and permission-less blockchain. As you already know from previous article’s video, the transactions that happen on blockchain are stored in ledger represented as a chain of blocks. Multiple transactions are recorded on one block and all blocks are connected by “chain” that organizes them in order. Where is this ledger (aka history of all transactions) stored? It is stored on “nodes”, that means computers connected to the network. Each node has a full and the exact same copy of the ledger.
Could you also join that network with your computer as a node? The answer to this question depends on what type of blockchain would you like to join: permissioned or permission-less? As the name may already hint it, you can join permission-less blockchain by connecting your computer to it as one of the nodes. The examples of most well-known permission-less blockchains are Bitcoin and Ethereum. But you don’t have to connect your computer to this network in order to be able to see all the transactions that happen on, for example, Ethereum network. By their nature, permission-less protocols allow all general public to see transactions that are happening on them. Check it for yourself- go to Etherscan.io and look at the right bottom corner (1) to see transactions in the real-time. You can see transaction ID (2), how much ETH was sent (5), from whom (3) and to whom (4). The TO and FROM fields are the wallet numbers, you can think of them as your bank account number. Following banking analogy If you were to send 10 EURO to your friend, you can imagine this value appearing with your IBAN as FROM and your friend’s IBAN as to.
As you can imagine such open ledger may not be useful for enterprises. A typical way for enterprises to use private blockchains is intra-business, ensuring that only company members have access. This is a useful business solution if there is no reason anyone outside of the company should be part of the chain as data can be restricted to certain individuals on a need-to-know basis. With fewer people as part of the chain, they are typically quicker and more efficient with an easier consensus process. When a blockchain is not opened for everyone, we are talking about permissioned blockchain. Company R3, for example, offers Corda- a permissioned blockchain specifically developed for enterprises.
If the company that provides permissioned blockchain solutions is listed on stock exchanges, here is your first way how to enter blockchain as an investor- you may want to consider investing in shares of companies that provide such solutions.
Smart Contracts- introduction to Etherum blockchain network
Before we move to what are the coin and tokens and why should you care, it is important to explain the concept of smart contracts. If you follow main-stream media, by now you must have red there about Bitcoin but also, most likely about Ethereum. Ethereum is a type of blockchain network, that allows to build smart contracts on top of it. What are these? The video below gives good and brief explanation of smart contracts:
Think of the implications of smart contracts as represented in the video above. The example in the video was a smart contract which managed money: based on weather or not kick-starter campaign’s goal was reached, the money would be sent to start up creator or returned to investors. Not every single contract is purely linked to money exchange, more often than not, they regulate exchange of goods and services. Those goods and services need to be somehow represented in the digital world. Let’s say you want to sell house using smart contract- you cannot place physical house on the blockchain network, but you can represent it in a form of token. The section below will help with a closer look what are cryptocurrencies’ coins vs tokens.
Cryptocurrency coins vs tokens- what are the differences?
The notions of cryptocurrencies coin and tokens are quite often used interchangeably, which is not entirely correct. Cryptocurrencies coins, similarly to money, are developed primarily as store or exchange of value. The most famous cryptocurrency coin is Bitcoin- at the moment of writing this article Bitcoin has 60% of market capitalization. On this page you can see the real-time updates.
In the next articles I will look at top few crypto currencies individually to describe what they are and what are the drivers of their value.
What about the tokens then? Tokens are digital representation of an asset that can be exchanged using blockchain network. If you would buy tokenized gold it’s not token that has intrinsic value, but the gold that token represents.
This brings us back to the smart contracts. As you remember, Ethereum is the blockchain featuring smart contract functionality. Ether (ETH), is the native crypto currency to Ethereum blockchain. As a coin, it can be used to exchange value between users (like when you send money to someone), but quite importantly it is also used a currency for smart contract applications that are developed on Ethereum blockchain. Those applications use tokens to represent some non-monetary asset. For example, Basic Attention Token, an application developed on Ethereum blockchain, allows users to be paid for watching advertisement, so the time of the user is represented in the form of a token. As you can see below, there is a very big number of tokens currently deployed on Ethereum network.
Now that we’ve covered the basic notions of what is blockchain? What types of blockchain are there? What are the crypto coins and how are they different from crypto tokens it is time to move to next steps. In the next article I will walk you through the crypto exchanges, wallets and tokens swapping.
Please leave a comment to let me know if the content is useful and understandable or if you disagree with any statement made here. I’d be looking forward to discussion and suggestions.