As the frenzy for initial coin offerings continues, much has been said about tokens, coins, and smart contracts. But what are they really?
Simply put, tokens are digital assets built on top of a blockchain, while coin is the cryptocurrency issued by the blockchain. Smart contracts, by definition, are self-executing contracts with the terms of agreement written directly into the lines of code. Currently, Ethereum is used to create any smart contract that represent the Ethereum tokens—until Bitcoin Cash came along.
The May 15 network upgrade of Bitcoin Cash (BCH) not only saw its block size increase to 32MB, but also restored certain OP_Codes for advanced functionalities. Restoring the OP_Codes would unleash the smart contract and tokenization capability on the security backbone that is Bitcoin.
“Currently, the most popular platform for tokens is Ethereum, but Ethereum is very complex and we don’t really need all these complicated features that Ethereum has, cause most people they just want a representative token,” Oldenburg told CoinGeek.com.
With the network upgrade, Bitcoin Cash can now offer merchants their own “representative, minimum viable token,” minus the complexities that Ethereum has. These representative tokens are also referred to as “colored coins” within the Bitcoin community.
According to Oldenburg colored coins work “by adding additional data to the transaction inducing the Bitcoins scripting language.” If that sounds confusing, the Bitcoin.com CTO suggests picturing a wallet as a collection of bank checks, where users can assign different colors for each bank check, so now the wallet has “one bank check with normal, normal USD, and then you have this bank check with $5, but it also represents 5,000 red tokens.”
“A colored coin is a token but the difference is that it’s native on layer 1 on the blockchain, which means that every single wallet can support it, and more importantly, SPV wallets will also support it,” he explained. “It’s not only for modified full nodes, which is the case with other token protocols like counterparty or OMNI.”