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It seems the main cryptos are divided into (very roughly) two parts: the original plain blockchain-based cryptos such as BTC, BCH, LTC... on one hand, and ethereum on the other hand which allows the deployment of smart contracts. At first, I thought ETH was the currency used by these smart contracts on the ethereum network, but then I saw that each company willing to run on ethereum (OmiseGO, Golem, etc.) issue their own tokens that should be used to pay for their services.

Sure, those tokens can be bought using ETH, but they can also be bought using e.g. BTC, so it seems one could just use smart contracts/dApps, BTC and tokens, and never has to use any ETH. Am I missing something and does ETH plays some special role?

(Please note my question is not about transaction fees nor velocity. I am not trying to advocate using BTC: it just happens to be very widely used on exchanges.)

marked as duplicate by Richard Horrocks, Malone, SteveJaxon, Community Nov 13 '17 at 23:32

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Well, ETH is the way that miners (and in the future, validators) are paid for spending (and in the future, staking) large amounts of money to secure/run the network.

On top of that, executing smart contracts isn't free. ETH is what we pay "gas" in, e.g. it's how we pay miners for processing/including our transactions in blocks, and those transactions can either just send ETH or execute smart contracts.

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Third party tokens created on the Ethereum platform are called ERC20 tokens named after the token protocol specification 'ERC20'.

Golem, Gnosis, Kin, among many others are all ERC20 tokens. What this means is that when tokens are transferred between parties, they are transferred via the Ethereum network. So each transfer incurs a small fee, aka Gas. (Gas is just another name for small amounts of Ethereum and should not be confused with the Gas token from the NEO network.)

Some 3rd party tokens/platforms do intra-platform transfers, which is why you can buy ERC20 tokens with Bitcoin on exchanges. For the most part however, token transfers between sovereign actors outside private sites are hitting the Ethereum blockchain and consuming gas in the process. Note, intra transfers on private exchanges don't hit the blockchain, but transfers on sovereign exchanges such as EtherDelta do hit the blockchain with each trade.

The more interactions there are with the blockchain, the more Ethereum is used. The more Ethereum is used, the more the ecosystem builds. Note, the gas is not destroyed, when used for a transaction, but rather provided to the miners to validate the transaction. (So in that respect Ethereum is more eco friendly with regard to the analogy between fossil fuels and will be actually eco friendly when the technology moves to Proof of Stake.)

Therefore Ethereum is both a store of value and a platform for smart contracts. I equate it to the HTTP protocol itself.

(Btw HTTP has had the 402 Payment Required specification since ~1990's which will likely be used for cryptocurrencies in the future.)

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