Cryptocurrency and Tokens

What is Cryptocurrency?

Cryptocurrency is a form of money used in the digital or virtual space. Its name comes from the use of cryptographic (encryption) methods during transactions.

Because cryptocurrencies can only be traded via blockchain networks, they are a core part of decentralized financial systems.

What is Cryptocurrency Used For?

Since cryptocurrency is the native currency of blockchain systems, it forms the basis of nearly all financial processes on decentralized networks. These include:

Digital Payments: Cryptocurrencies are primarily used for peer-to-peer (P2P) payments and online purchases. Blockchain technology allows these transactions to happen nearly instantly anywhere in the world, making crypto ideal for international payments. A key benefit of crypto payments is that they happen directly between the parties involved, with no need for banks or intermediaries. This speeds up the process and significantly reduces costs by avoiding extra fees.
Lending and Borrowing: Decentralized platforms also enable crypto-based loans. Just like with traditional lending, the lender can charge interest on the loan.
Storing of Value and Investment: Like traditional currencies or financial assets, cryptocurrency values fluctuate depending on economic conditions. As a result, some investors treat crypto as an alternative to gold or stocks, hoping for value growth.
Smart Contracts: Smart contracts are automated programs that run on the blockchain. They support automated payments, purchases, loans, and interest collection using cryptocurrency.

How is Cryptocurrency Created?

Cryptocurrencies can be generated in different ways, depending on the consensus mechanism of the blockchain they're part of. The most common methods include:

Centralized Issuance: A central authority, like a government, central bank, or a community, creates and manages the cryptocurrency and its usage framework.

Mining (Proof of Work – PoW): On some decentralized chains, like Bitcoin, miners compete to solve complex mathematical problems. The first to solve the problem validates the block and earns a set amount of cryptocurrency.

Staking (Proof of Stake – PoS): In PoS systems, validators are chosen based on certain criteria. They must “stake” a portion of their crypto as collateral. If they act dishonestly, they lose the staked amount. The more they stake, the more likely they are to be selected as honest validators, earning rewards in return.

What is the Difference between Cryptocurrency and Tokens?

People often use the terms cryptocurrency and token interchangeably, but they serve different purposes.

A cryptocurrency is a digital currency built on its own blockchain, used primarily for financial transactions, such as payments, purchases, loans, or credit, similar to traditional currencies.

A token, on the other hand, is a digital asset that represents ownership, access rights, or the value of real-world assets or services. Tokens are mostly used for fundraising or trading ownership. Unlike cryptocurrencies, tokens don’t require their own blockchain and can be traded across multiple blockchain networks.

How are Tokens Created?

Tokens can be generated in several ways. The main approaches include:

Initial Coin Offering (ICO): A startup offers tokens representing partial ownership of the company to raise capital for its launch. Investors gain ownership and possibly voting rights.
Token Generation Event (TGE): Existing businesses use this method to sell ownership or real asset rights. Investors gain more security since they know the company, but prices may be higher than in an ICO. The company receives funds for growth.
Tokenization of Real World Assets (RWA): Any physical item with real-world value, like real estate, commodities, or even solar systems owned by energy communities, can be represented by tokens. These tokens can then be traded both on and off the blockchain.

What Determines the Value of Cryptocurrencies and Tokens?

Several factors influence their value:

Supply and Demand: If demand exceeds supply or availability is limited, prices go up.
Utility: If a cryptocurrency is widely accepted or a token serves multiple functions, their value increases.
Market Sentiment: Investor mood, trends, news, and public figures can drive prices up or down sharply.
Availability: Tokens or coins with limited supply often become more valuable due to scarcity.
Technology and Security: The strength and reliability of the underlying blockchain and consensus mechanism affect trust and investment potential.

What Role Do Tokens Play in Energy Communities?

Tokens are vital to the functioning of energy communities (ECs), helping manage energy trading, shared asset ownership, and investment.

Let’s look at their roles in more detail:

Enabling Energy Trading: Energy is a real-world asset and can be tokenized. Surplus energy can be sold within the community using tokens. Thanks to smart contracts, these transactions – sales, allocations, payments – happen instantly. This increases flexibility, efficiency, and reduces dependence on centralized energy providers.
Governance and Decision-Making: Token holders can vote on EC decisions based on how many tokens (i.e. how much shared ownership) they hold. Token-based voting ensures democratic and transparent decision-making.
Capital Raising: Through ICOs, TGEs, or tokenized real assets, communities can raise funds to start or expand energy projects by selling ownership in token form.
Transparency and Trust: Blockchain’s transparency, smart contracts, and consensus mechanisms make token transactions fast, automatic, anonymous, and tamper-proof. Everyone plays by the same rules.
Encouraging Sustainability: With the right incentives, producers can be rewarded with tokens for generating and selling renewable energy. This encourages the installation and expansion of green energy systems and supports overproduction, increasing the share of renewable energy in use.