You’ve probably heard by now of terms such as cryptocurrencies, tokens, coins, altcoins, or digital/virtual currencies. But what do all these terms actually mean? Most of the time they are used interchangeably without being incorrect, but there is a subtle difference between them. In today’s guide, we will discuss the differences between coins and tokens.
What are Cryptocurrencies?
Cryptocurrencies are digital or virtual currencies that are encrypted with cryptographic algorithms to secure and verify the transfer of transactions. These transactions run on a public ledger called blockchain which records and validates them chronologically.
All coins or tokens are considered to be cryptocurrencies, even if most of the coins are not used as a currency or way of exchange.
The term cryptocurrency is a misleading term since a currency technically denotes a unit of account, a store of value and a medium of exchange. All these features are characteristic of Bitcoin, and since the cryptocurrency space was created when Bitcoin appeared, any other coins developed after Bitcoin are normally seen as a cryptocurrency, though most do not satisfy the above-mentioned criteria of an actual currency.
Coins, which are also called alternative coins, or altcoins, is a cryptocurrency type that functions independently of any other platform. Each coin has its own native blockchain platform, where transactions with said coin take place. Most of the existing altcoins are a version of bitcoin (a fork), which has been created using bitcoin’s original protocol with some modifications brought to its underlying code, thus resulting in a distinct new coin with different characteristics. Examples of forked altcoins are Litecoin, Dogecoin, Namecoin, Bitcoin Cash and many others.
There also altcoins that were not created through a Bitcoin fork. Altcoins such as Ethereum, Monero, and Ripple, run on their own blockchain and code that was designed to support their in-house currency. This category of coins is rather confusing, while they do have some proprieties of currencies, they also have other functions aside from being used as money.
A token is a type of cryptocurrency (with no currency use case), that is usually created on top of another blockchain. Tokens usually represent a certain type of utility or asset, or sometimes both.
Tokens are created and issued to the public through an Initial Coin Offering (ICO), which is a way of raising funds, by releasing a new cryptocurrency or token to finance the project’s development.
Tokens are issued much more easily than coins, as the source code from the original protocol does not have to be modified, and no blockchain has to be created. Most tokens (40 and counting) are hosted on Ethereum’s blockchain and Ether is the primary currency that is used on the distributed ledger. So, basically, tokens are a means of access or an asset of a particular application which is built on a blockchain system, that also has market value but it is still not technically a currency.
Another difference would be that coins can exist independently, but tokens require other blockchain platforms to exist and operate.
The fine line between coins and tokens still produces much confusion among crypto enthusiasts and financial regulators. However, one main difference is their structure, as coins can be used as currencies and have their own blockchain, while tokens reside on a blockchain to be used in decentralized apps.