I found this article on bitsonblocks.net by which helps the understanding of Crypto and bank accounts, its a great why to look at what Tokens are how they work and want means for the future of digital currency
Those arenâ€™t the tokens youâ€™re looking for
The word â€œtokenâ€ has been misused a lot. Crypto/Fintech has got this word really wrong, (and for that matter, â€œp2pâ€), and over the years it has stuck, causing a lot of confusion, but itâ€™s now the word we use.
In terms of Token vs Account based payment systems, Token means that â€œthe object is the assetâ€, and â€œpeer to peerâ€ means â€œPerson A transacts bilaterally, directly with person Bâ€. Think of a casino chip: Itâ€™s a token, and it is passed from person to person without any 3rd parties updating any books.
In an account-based system (think of your bank account or Venmo/Grab wallet), a 3rd party (not party to the transaction), is informed and it updates its books, representing a change in the owner of the asset.
Crypto â€œtokensâ€ (BTC, ETH, ERC-20 stablecoins) are all account-based. They are not tokens, in this context. The data doesnâ€™t move from sender to recipient. Actually, a transaction instruction is sent to an amorphous 3rd party accounting system called â€œthe blockchain networkâ€, which adjusts balances associated with accounts.
Itâ€™s not peer to peer either
In most of blockchainland, the recipient doesnâ€™t even need to be online to receive funds, so it canâ€™t be peer-to-peer. But often â€œp2pâ€/â€peer-to-peerâ€ is used to describe these transactions. How come?
In the payments industry, p2p is used to differentiate from p2m or peer-to-merchant payments (or c2b consumer-to-business). The payments industry needs to differentiate p2p and p2m because of the way it charges fees is different for each flow (p2m is more profitable than p2p which is typically free).
E-money wallets particularly liked marketing using the phrase â€œp2pâ€ as something shiny and new and cool, but actually a Paypal user paying another Paypal user for a non-commercial transaction is no different from an HSBC retail customer paying another HSBC retail customer: The sender sends an instruction to the bookkeeper, who makes a book entry update -10 to one account, +10 to another account.
What the wallets did was speed up p2p payments. They made the recipient aware of their received funds more quickly than traditional banks did. But instead of saying â€œitâ€™s quickerâ€, the wallets said â€œitâ€™s p2pâ€, and p2p became synonymous with â€œinstantâ€.
However, software engineers, when talking about network architecture, mean p2p differently and more specifically. It describes the architecture of how data moves around a network, and implies a lack of a central server.
Bluetooth is p2p technology because it enables two devices to talk to each other and send data to each other without needing to communicate with a mothership. Whereas cloud storage is not p2p because your data is stored by a central server and served to your devices.
So Ethereum (and all of its â€œtokensâ€) is actually an account-based system where data between the accounting nodes is gossipped in a p2p manner (but payments are equivalently p2p as an internal bank transfer).
And one more thingâ€¦
But thereâ€™s one additional layer of complexity that has created confusion. Although Bitcoin and Ethereumâ€™s network architecture is fairly similar, the way transactions are created and recorded are different, and this leads to people differentiating â€œBitcoinâ€™s token-based (or UTXO-based) model vs Ethereumâ€™s account-based modelâ€.
In Bitcoin when you spend BTC you have to identify a specific inbound transaction where you received BTC, and say â€œI am going to spend that specific lump of BTC I have receivedâ€. In Bitcoin, BTC exists as â€œlumpsâ€ in your account (like coins/banknotes in your wallet), where each lump has a specific history.
On the other hand, in Ethereum (as with bank accounts), you say â€œSpend some money from my accountâ€. In Ethereum there is less traceability of any specific amount of money â€“ once money is in your account, itâ€™s comingled with all the other money. So thatâ€™s a context in which you might say Bitcoin is a token-based system, because the lumps of BTC are sorta like tokens?
Soâ€¦ You could say Bitcoin is an account-based system that records the movement of BTC tokens. Payments are not peer-to-peer but the accounting updates are!
And the quibble
Itâ€™s great to see efforts attempting to move us away from tokens and accounts. However there is one paragraph in the Liberty Street Economics post that I just donâ€™t think is accurate. The authors write:
One important difference between Bitcoin and a physical payment object, such as a dollar bill or a gold coin, is whether the payee can ascertain the unitâ€™s validity with reasonably high confidence. For example, dollar bills have security features, which are easy to identify and difficult to counterfeit. In the case of a digital currency, it is not possible for the payee to ascertain the authenticity of the digital payment instrument independently.
I find this to be the opposite of true. Iâ€™m sure many of us have inadvertently handled counterfeit dollar bills, whereas itâ€™s really really hard to counterfeit a bitcoin: the wallets (many of them open source so anyone can independently verify they are reading the blockchain accurately) just donâ€™t pick up counterfeit bitcoins.Â
Original post HERE