A Beginner’s Guide to Protocol Coins and Tokens

By Prashant Jha

In the world of crypto and blockchain, the word “cryptocurrency” is frequently used as a blanket term to describe any sort of coin or token created and encrypted using principles of cryptography. However, there are minute differences even between these seemingly similar categories and today we take a look at protocol coins and tokens, a category of crypto that needs to be clarified separately from ordinary discussions on cryptocurrencies.

Difference Between Coins and Tokens

With regard to the differences between coins and tokens, it is essential to remember that crypto coins are basically digital cash that show characteristics of money such as storing value over time, while tokens allow users to have stakes and rights within a network while also facilitating intra-network payments. Having said that, protocol coins and tokens are a rather intriguing branch of the crypto coin tree that deserves a comprehensive guide to itself.

Blockchain Basics

Technologies ranging from the world wide web to blockchain technology each have a protocol layer and an application layer. For example, in internet, we have the freely usable TCP/IP/HTTP protocol layers, on top of which developers have managed to create application layers that can be greatly monetised and used to create value. In case of the internet, examples of such applications include websites such as Google. Now, in this case, the protocol layer, despite being imperative to the superstructure that is the application layer, could not have been monetised. However, the blockchain architecture, with its decentralization and the ability to use cryptographic tokens, makes it possible to add value to the protocol layer too, monetising it in the process. These very tokens and coins would be the protocol coins and tokens.

What are Protocol Coins and Tokens?

Now, if we try to monetize the protocol layer using tokens and coins, we basically make it essential to use these protocol coins and tokens to be able to use these protocol layers at all. For example, if you read a guide to Ether: the cryptocurrency of Ethereum, you will understand how Ether is essential to the functioning of the Ethereum protocol layer. When adoption of the protocol layer increases, according to the Metcalfe’s Law, the value of these coins and tokens also spike. This helps to solve the issue that the internet had: the persistent inability to attribute some kind of a value to the protocol layer despite its essentiality in building the application layer. In blockchain, the use of tokens helps make an economic value out of the basic open source protocol that the developers gave time and effort to build.

Ethereum, NEO, Lisk, Sia, Cardano,Qtum, Loopring,Filecoin etc. are some major examples of such coins and tokens. Although protocol incentivization is still a nascent concept in crypto, it is interesting to consider how they can be used to add value to a protocol everytime somebody wishes to build and use a decentralized application (dApps) on the protocol layer.