As you can imagine, it’s incredibly tough for anyone new to the cryptocurrency space to keep up with the various types of coins and tokens in this expanding ecosystem. With new and upcoming projects being released every month, it’s extremely hard for newcomers to this space to acquire a solid understanding on the various types of tokens which currently range from security, payment, utility, app, and protocol tokens.

 

Today, we’ll be covering the primary differences between app coins and protocol tokens. This way you’ll be able to comprehend the purpose of what each one entails in your ongoing quest for knowledge in this newly evolved tokenized market.

What is a Protocol?

 

In order to get a deeper understanding as to what protocol tokens really are let’s define what a “protocol” is. Protocols are a set of ideas or rules that govern a particular ecosystem. This system of rules allow two or more entities to transmit information.

Protocols also define the rules, semantics, syntax, synchronization of communication as well as potential recovery methods. These protocols are also implemented by hardware and software (or both simultaneously).

One of the most popular protocol systems to date is the TCP/IP protocol, which is the underlying foundation behind the internet. This protocol allows for two or more computers to communicate with each other and has been widely adopted as the network standard.

 

TCP/IP breaks down data into packets which can then be transmitted, routed, and received to their corresponding destination points. It’s designed to ensure networks are reliable, with little to no central management. It also has the ability to automatically recover from the failure of any one particular device within a network.

With the inherent control that protocol has over communication and data, it has recently undergone a revolutionary change to way it’s being utilized as well as monetized due to the birth of blockchain technology.

The Incentivized Evolution of Blockchain Protocol

 

Before blockchain technology, protocols were researched and developed by highly skilled developers and funded by nonprofit organizations. However, the applications that were built on top of the protocol (like Facebook, Twitter, Google) had much more economic incentives for investors to invest in the actual applications than protocol. This enabled early adopters to profit from the social media and web application that has been apparent over the last decade.

These developments inherently left protocols in the dust since there were little to no returns for investors who wanted to expand the tech behind protocol expansion. It created an “internet stack” which included thin protocols and fat applications in terms of how the value was distributed.

However, once blockchain was introduced to the world, the game completely changed. It not only changed, but got flipped on its head. The way in which revenue would be generated for protocol technology is now forever revolutionized by the introduction of blockchain technology.

Now introducing decentralization…

Since no one entity controls blockchain, the barrier for entry is extremely low. More developers can now create applications and products on top of protocols. The more the application garners attention, the more it increases the value of the underlying protocol. Just like that, we have a system that heavily favors this foundational technology. By utilizing fat protocols and thin applications, incentivizing protocol becomes the new standard.

The Emergence of Protocol Tokens

Due this new evolutionary purpose for incentivizing protocol within blockchain, the so-called “fattening” of the protocol layer became more and more prevalent. This is due to the increasing in popularity of cryptocurrency tokens.

Before blockchain, there was no economic incentive for protocol. However once incentivized tokens were created, appropriately named “Protocol Tokens”, developers can now finally work on the best interest of the protocol.

Today companies are creating a wealth of value for themselves (as well as investors) for as long as these protocol tokens are retained. As a secondary benefit to this incentivized system, the more effective the protocol is, the more prevalent the adoption becomes. With more adoption, there is more perceived value for the protocol, hence increasing the value of these protocol tokens. A great example of this is Ethereum.

Before the birth of blockchain, developers could only make money from the protocols within the software they created. However, with protocol tokens, developers can now directly monetize their protocols and increase its underlying value, enabling more software to be developed on top of its existing tech.

The Result of Protocol Token Incentivization

As a result of protocol tokens, more advanced protocols can be created, allowing much more value to enter the blockchain ecosystem.

Not only is this great for developers, but it’s extremely beneficial for investors as well. As more investors invest their capital into viable tokens, this will in turn help developers create a living for themselves and maintain a continuing workflow of new ideas.

Once both interest and investments in a project increase, the influx of value into that corresponding protocol increases as well. When this happens, the overall market cap of the network grows.

Naturally, once the protocol is deemed increasing valuable, more developers will be attracted to the network and proliferate the overall value once again. This cycle has been coined the term “token feedback loop”.

Typically, the market cap of a protocol token will always grow faster than the combined value of the applications built on top of it. Note that this can potentially bring up future issues regarding the clogging of entire cryptocurrency networks, but is typical and expected with any fast growing technology.

This was recently demonstrated with CryptoKitties, back in October of 2017, on the Ethereum network.

What Exactly is an App Coin?

App coins are tokens that run inside the applications built on protocols. To give you an example, Ethereum would be considered a protocol where Augur would be the inherent application built on top of it. The inherent protocol tokens for the Augur application are called “REP”.

Now there are coins that you can use inside the Augur application (separate from REP) that you will need in order to make purchases inside Augur. These are commonly referred to as app coins.

To give you a better idea on how protocol tokens and app coins coexist, let me give you a brief analogy.

Let’s pretend we have a blockchain called “United States” where the protocol rules dictate that transactions can only be allowed by their currencies exchange. In order to facilitate this protocol, US dollars are created (USD).

Inside of the “United States blockchain” are a set of marketplaces where food and clothing can be purchased. However these items can only be purchased through a token counter where USD is exchanged for these food and clothing tokens. Let’s name them “America Coins”. Once these coins have been obtained, you can now utilize them to purchase what’s inside the marketplace. As you might’ve guessed by now, the “America Coins” are the inherent app coins derived from the USD protocol tokens.

Take note that these app coins are only valuable inside the food and clothing marketplaces and cannot be used anywhere else. As you can see, you can’t have app coins without its underlying protocol tokens. One cannot exist without the other.

Another great example of app coins would be within the online gaming community (especially online multiplayer games). A gamer can use their fiat currency to purchase in-game tokens which can then be used in various ways to purchase items such as weapons, armor, skins, etc.

App coins are another great way to reward and incentivize people to spend their time and currency within a company’s own proprietary online ecosystem. This effective and synergistic system allows for both investors and players to increase their protocol tokens value while players are rewarded for their time invested in playing. This will therefore increase the overall protocol value of the application.

Conclusion

I hope you walk away from this article with a more clear understanding on the differences between protocol tokens and app coins. Remember that protocol tokens control the overall “value of the protocol system” within an application while app coins help fuel the monetary ecosystem within that protocol. This synergistic system will effectively increase adoption of useful protocols for many years to come.