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The crypto space is filled with a dazzling array of jargon, buzzwords and arcane terminology. And if you’ve decided to dip your toes into the cryptoverse, you’ve probably heard the terms coin and token thrown around. You could be forgiven for assuming they mean the same thing. Even industry experts sometimes use them interchangeably. But just like concrete versus cement, crypto tokens and crypto coins are different, though they may frequently be confused — especially on the Internet.
Knowing the difference between tokens and coins helps you understand the crypto market better. Token and coin projects may have different technological challenges. You’ll also be able to discuss crypto developments while demonstrating in-depth awareness of the market. This article defines the differences between tokens and coins, as well as their individual uses and main attributes.
Tokens and coins are subclasses of digital currencies, which can be owned, used and exchanged. But they only exist digitally in electronic form. While all cryptocurrencies are digital currencies, not all digital currencies are cryptocurrencies. The main difference between these two boils down to their utility.
Though tokens and coins are fundamentally alike since they offer a secure way of using digital assets as a currency, a store of value, and a way for the payment process. These digital assets use cryptography, a high-level encryption method that prevents forgery and double-spending, thereby maintaining the integrity of crypto-based digital assets.
The blockchain is a decentralized database distributed among nodes of computer networks which securely tracks digital asset ownership using cryptography. Blockchains make it possible for digital assets to be created, traded and stored. The decentralized structure of blockchains allows anyone to transact in cryptocurrencies and tokens directly, without needing a central party such as a bank, broker or other intermediaries. Essentially, removing third parties from financial transactions makes them faster, cheaper and easier.
A crypto coin is a digital asset native to a blockchain network that is used as a means of exchange and as a store of value. It runs on its own blockchain network, rather than on another asset’s blockchain. That also means that these coins do not move away from the network, but the changes only appear in the account balances. For example, if Alice transferred money to John, the changes are only made on both of their accounts’ balances with a fee incurred.
Cryptocurrencies or coins are created by mining, a process that typically uses either proof of work (PoW) or proof of stake (PoS) verification. PoW uses enormous amounts of computer power to solve mathematical problems, and creates coins to reward miners. PoS mechanisms create and validate transactions based on coin holdings. Additionally, crypto coins are used to pay transaction fees on their networks.
Cryptocurrencies are decentralized — that is, they do not rely on any central authority to function. Instead, computer nodes manage all transactions and activities. While the code allows users on the network to operate within the rules automatically — permissionless and “trustless,” meaning trust per se is not required, since transactions are enforced by smart contracts that execute only when mutually agreed-upon terms are met.
A crypto token represents the units of value built on existing blockchain networks using smart contracts. Tokens essentially piggyback on another blockchain, sharing compatibility with that blockchain’s native cryptocurrency.
For instance, Tether (USDT) is a popular token that operates using ERC20 standards. Tether is built on the Ethereum blockchain and can be sent to any Ethereum address.
Tokens primarily function as utility crypto digital assets within projects. They can be used to reward specific actions, raise funding, or pay fees. There are thousands of tokens currently in use. However, they can be classified into five main types:
Utility tokens
Transaction tokens
Security tokens
Non-fungible tokens
Governance tokens
Utility tokens grant users access to a blockchain-based service. For instance, the Basic Attention Token (BAT) is used by advertisers on the Brave web browser to pay publishers, who in turn reward their audience in BAT when they view ads.
Tokens such as Tether (USDT), Binance USD (BUSD), and Dai (DAI) are known as stablecoins. They are collateralized by and usually pegged to fiat currency. This means they aren’t prone to crypto’s notorious volatility and, therefore, are useful as a means of exchange and store of value.
Security tokens are conventional securities such as stocks and shares that have been converted to digital tokens on a blockchain. These tokens give holders the right to a slice of the company in which they’ve invested. As with traditional securities, security token holders also get a cut of the company’s profit.
Non-fungible tokens (NFTs) are reaching breakthrough transaction volumes, expected to be at least $17.7 billion by year-end. They are unique cryptographic tokens that exist on a blockchain used to digitally represent ownership of unique content. They can be traded or exchanged, however, they are irreplaceable thereby making it impossible to represent their value equal to one another.
Governance tokens give the token holder the right to propose and vote on changes within a blockchain project. By doing so, users directly influence the operation and direction of a protocol.
Crypto token projects make use of several token standards for token creation. ERC20 and ERC721 are some of the most-used token standards, enabling the creation of tokens that seamlessly integrate with the Ethereum blockchain. While the ERC20 standard supports tokens that integrate with the Ethereum suite of DApps, ERC721 is designed to create non-fungible tokens.
According to State of the DApps, there are over 3,000 DApps currently running on various blockchains. DApps — decentralized applications — take a decentralized approach to data management using blockchain technology. These DApps focus on decentralized finance (DeFi), a blockchain-enabled solution to real-world finance problems. Each DApp has a digital asset or token with which users interact. Ethereum’s blockchain is the most popular platform for creating crypto token projects.
Tokens have a vast range of uses within their ecosystems. Tokens on crypto platforms such as Golem (GLM), 0x (ZRX), Civic (CVC), Raiden Network (RDN), and Basic Attention Token (BAT) are used as a means of exchange, as well as to carry out specific functions that range from loaning out computing power to using decentralized exchanges (DEXs).
Augur (REP), Keep Network (KEEP), Truebit (TRU), Chainlink (LINK), and Gems (GEM) tokens are used to perform work and/or maintain the integrity of their projects.
Other popular crypto tokens include MakerDao (DAI), Compound (COMP) and Decentraland (MANA). These tokens are used for lending and borrowing, gaming, and as NFTs.
Now that we know the fundamental distinction between tokens and coins in crypto, evaluating whether Bitcoin is a coin or token is easy. Bitcoin is a coin because it has its own blockchain. In fact, Bitcoin was the first cryptocurrency coin, and many projects in the cryptocurrency market have been modeled after or inspired by it. For example, Ethereum elaborated upon the concept of a decentralized currency to popularize smart contracts that run when predetermined conditions are met.
Coins were developed to be used directly as currency and as a store of value. In other words, holders can use them to pay for goods and services. On the other hand, while tokens can be used for payments, they also have other forms of utility and play significant roles in DeFi, gaming and DEXs.
For instance, AAVE is the Aave protocol token. Aave is a DeFi protocol which allows crypto lending and borrowing activities without a centralized middleman. Aave is built on the Ethereum network, and all of their transactions use AAVE tokens, which run on the popular ERC20 token standard.
Coins are created on a blockchain platform. The project must design security protocols and reward systems, as well as dictate how a coin will be created, how to manage the coin supply, and how to record and process transactions.
Meanwhile, tokens rely on the existing protocols of their operative blockchains. Interestingly, a token can run on several blockchains. This gives tokens the advantage of speed and flexibility, meaning they can be exchanged more easily with other digital assets. For instance, Tether issues tokens on several blockchains, including Ethereum, Tron, Bitcoin, Algorand, SLP, and OMG.
Tokens and coins are both digital assets, and have a lot in common. They can be used to represent value, and as a medium of exchange.
The main difference between them is that coins run on their own blockchain, while tokens don’t. Instead, tokens run on existing, independent blockchains.
Utility is another way in which tokens differ significantly from coins. Tokens can have many uses, unlike coins, which are primarily used to exchange and store value.
Tokens and coins are critical parts of the crypto ecosystem, allowing users to interact with blockchain-enabled digital assets. An informed investor benefits by understanding the slight but essential differences between a token and a coin.
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