When you get involved within the cryptocurrency landscape, undoubtedly, you may stumble across the token vs. coin dilemma, as they are under the same crypto umbrella.
While they both represent blockchain-based cryptocurrencies, crypto tokens are not the same as crypto coins, and the distinction becomes essential when you’re choosing to invest in or build a cryptocurrency.
Yet, some technical differentiators could significantly impact your investment strategies, but we’ll delve into this in the following chapters.
Until then, as a quick tip, be sure to get familiar with the blockchain technology and what it represents, as this is crucial for your understanding of the coins and tokens. As such, we recommend you read a simple but complete guide on blockchain technology.
Crypto Coins vs. Tokens at a Glance:
- They adhered to a specific blockchain technology.
- They act independently of other chains but are limited to their native chain.
- Crypto coins could be a prosperous medium of exchange, as they store value and are a great unit of account.
- Tokens sit on top of the blockchain technology, as they don’t have a native blockchain network.
- Their decentralization power depends on the underlying blockchain network, and other blockchain projects can support them.
- Tokens provide utility, governance rights, shares of ownership, and others.
As said, these are just a few differentiators, but read further and explore this crypto landscape to know better how to strategize your investment further.
Crypto Coins | A Deep Understanding to Get You Started
What is a Crypto Coin?
If traditionally, we defined a coin as a piece of metal with an official stamp issued by the government and used as a currency, things are a bit different in the cryptocurrency world.
As such, the coin definition is that of a digital currency powered by its own blockchain, with no physical, real-world equivalent.
The blockchain, distributed ledger technology works like databases passed around from one node to another, whereby the data represents the entries about how many currency units each address holds.
The conditions in which the data is passed and how the nodes communicate with each other are defined by a set of rules called a protocol.
The characteristic of being based on its own blockchain is significantly vital for a currency. Thus, establishing its protocol gives the currency the highest level of independence and flexibility. Additionally, the company or group that started it can decide on every aspect of the cryptocurrency, like consensus mechanism, fees, or transaction mechanism.
A good example could be the Bitcoin blockchain. Well, BTC holds the characteristics of a legitimate currency: a unit of account, a store of value, and a medium of exchange.
However, as Bitcoin was the first currency created, most of the coins that followed it still needed to fully meet the requirements of a currency, some even having the characteristics of a token.
Yet, they are called altcoins – alternative coins, as they are standalone, having their networks. As a result, there are over a thousand altcoins, and the vast majority are Bitcoin variations, hence the name – LiteCoin, DogeCoin, and so on.
Examples of the most popular crypto coins:
- Bitcoin Cash;
How are Crypto Coins Created?
Crypto coins are born upon the mining process, whereby a computer is used to solve complex math puzzles to validate each transaction produced by the said currency. Since the mining subject is complex, we’re not going into details.
We’re only stating that, as a general rule, the first computer that solves the puzzle gets rewarded with that specific currency. This comprehensive process ensures network security, directly contributing to the decentralization of the blockchain.
What are the Features of Crypto Coins?
Usually, all the crypto coins have the same features in common, as they operate on the identical blockchain, act as money, and can be minted. But allow us to explain this in greater detail.
Crypto Coins Operate on the Same Blockchain
Since a digital currency is deepened on its blockchain, the coin wouldn’t exist without it. Understanding this great feature that makes the crypto world go round is vital. To explain this better, we’ll take Bitcoin as a great example.
We all know that a coin runs within its native blockchain, and additional forks appear due to altering the existing blockchain protocol. In the Bitcoin case, there were Bitcoin and Bitcoin Cash after the forking, whereby BTC remained the original and single native coin of the original Bitcoin blockchain.
Additionally, a coin’s intrinsic value is established based on the security and efficiency of the underlying blockchain technology.
Crypto Coins Act as Money
By now, we all know that crypto coins act as digital money, with the same attributes as the traditional currencies we are all aquatinted with. To name a few, we have:
- Reserve of value.
Moreover, as a result, crypto coins have already been accepted as a payment method by companies like Microsoft, PayPal, Starbucks, and others. For example, Ether is the transactional coin of the Ethereum blockchain, often acting to fuel transactions.
Crypto Coins can be Minted
Remember that we explained to you the fact that coins can be minted?
Well, the mining process is crucial for the security and integrity of the blockchain, as it validates the transactions and maintains the decentralized aspect that we all love.
Additionally, crypto miners are incentivized with the said currency or other rewards, often subtracted from the network fee we all pay upon transacting.
Coins Harness the Power of Decentralization
We cannot mention the different mechanisms used to validate crypto transactions, such as Proof-of-Work and Proof-of-Stake. As any form of central authority does not control them, coins are governed by their protocol and community consensus.
Additionally, due to the PoW consensus mechanism, the network participants or validators use much computational power to verify transactions. We will not go into details, but if you want to learn more on the subject, be sure to learn more about why PoW is the foundation of crypto.
Security and Scarcity
Since most coins have a limited supply due to their algorithm and are protected by cryptographic encryptions, they create a deflationary effect that increases their value over time.
The best example is Bitcoin for the limited supply and Ethereum blockchain for the deflationary aspect. However, not all coins are scarce – if it were to look at the original meme crypto, Dogecoin, that has no cap on its supply.
What are Crypto Coins Used for?
Digital coins have the same purpose as fiat currency despite the technical differences:
- Transfer money;
- Store value;
- Unit of account;
- Medium of exchange.
Types of Coins
Based on how they were created, crypto coins can have multiple types:
Native coins – this type runs within their blockchain and acts as the main currency of the network. For example, BTC is the native coin for the Bitcoin network.
Forked coins – are derivates of the existing blockchain upon which it was branched out. A good example is Bitcoin Cash (BCH).
Wrapped coins have the liquidity property and can perform cross-chain. E.g., Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH).
Stablecoins – as the name says, this type has the sole purpose of providing price stability and reducing volatility within the crypto market. E.g., Tether (USDT) and USD Coin (USDC).
Getting Started with Crypto Tokens: A Comprehensive Understanding
What is a Token?
Crypto tokens are a digital representation of an asset in the cryptocurrency market. These digital assets the crypto tokens represent embody a utility, tradable commodity, loyalty point, voting rights, and more.
On the other hand, the Cambridge Dictionary defines a token as:
- An action or a gift that expresses feelings or intentions.
- A piece of paper with a particular amount of money printed on it that can be exchanged in a shop for goods of that value.
- Some machines use a round metal or plastic disc instead of money.
Unlike coins, crypto tokens are built on top of the blockchain platform; therefore, they use a predetermined protocol with no say in the network’s development.
Additionally, tokens are defined by the smart contract, also known as a self-executing code, and may gain value through their purpose.
To better understand the concept, we’ll take Tether as an example. This crypto token is known for operating on the ERC-20 standards since it is built on the Ethereum blockchain and can be sent to any Ethereum address.
Examples of the most popular crypto tokens:
- USD Coin;
- Binance USD;
- LEO Token;
- Shiba Inu;
- Lido Staked Ether;
How are Crypto Tokens Created?
Everyone is surprised that a crypto token requires little to no technical abilities or coding skills, yet it could be a plus. Moreover, since they are pre-minted, tokens serve their purpose by using smart contracts to create new tokens.
There is another option for a crypto user to create a token – a token generator. This platform offers an easy-to-create basic token, whereby building a more advanced token requires additional technical skills.
Regardless of the token you wish to create, both options require using a smart contract, having its terms and conditions embedded within the blockchain code.
What are the Features of Crypto Tokens?
As we all know, most tokens could open a new world of possibilities with additional use cases in various industries. But let’s discover more about the subject and what a token represents through its use cases and features.
For example, tokens can be used to create a decentralized financial system like lending and borrowing platforms, digital assets management solutions, insurance services, and others. Ultimately, these systems help increase efficiency, transparency, and accessibility.
Another way a utility token can be used is within the supply chain management. These can track and verify the goods from the supply chain, ensuring transparency.
Crypto tokens can also ensure a transparent, secure, decentralized voting system for communities or other parties.
And, of course, we need to address the entertainment sector as well since NFTs and semi-fungible tokens have opened up new possibilities for creators, collectors, and gamers.
What are Crypto Tokens Used for?
Essentially, tokens are used to raise awareness of start-ups to raise funds and capital. And here comes tokens into play. If, in the first stages, companies sell their digital assets through the initial coin offering, tokens serve as their currency and offer access to additional features within a decentralized application.
Types of Tokens
Its primary function as a token is being a utility crypto digital asset within projects. On the blockchain, there are thousands of tokens currently in use. However, they can be classified as follows:
- Utility tokens or application tokens grant access to a blockchain-based service; in short, you will need a particular utility token to perform actions on an altcoin’s network. Some utility tokens examples are Uniswap (UNI) and Chainlink (LINK).
- Transactions tokens, also known as payment tokens, can be found as tokens such as Tether (USDT), Binance USD (BUSD), and many others, which are generally backed up by fiat money and are tied to it.
This way, tokens are not subject to crypto’s notorious volatility; therefore, they can be used as a medium of trade and store of wealth.
- Security tokens are known as stocks and shares that have been transformed into digital tokens on the blockchain, whereby they act as traditional securities. Yet, security token holders are entitled to a piece of the firm they’ve invested in. Moreover, a security token may also have the functionality of utility tokens and often are called asset tokens.
- We couldn’t move forward if we didn’t mention the equity tokens, which are a subset of security tokens. Also, these equity tokens are issued through an equity token offering (ETO) process.
- Non-fungible tokens – are one-of-a-kind cryptographic tokens that exist on a blockchain and are used to represent the ownership of unique content digitally. Additionally, non-fungible tokens can be traded or swapped but can be irreplaceable.
- Governance tokens – people with this type of token can propose and vote for the modification of a blockchain project, directly influencing the trajectory of a project. Usually, these tokens are created as ERC20 and ERC721.
A token is leveraging an existing coin. Therefore, it’s subject to any uses and limitations the network has. You can make your cryptocurrency in under half an hour through a smart contract. However, the ease and speed of building a token are paid in fees to the platform.
Coins vs. Tokens – What’s the difference?
The long-standing confusion between token vs coin can take time and effort to understand. As such, be sure to read further and understand the main differentiators:
#1 Different algorithm
There is a clear distinction between coins and tokens regarding the algorithm:
- A coin is based on its own blockchain;
- A token is based on a smart contract on top of an existing blockchain.
#2 Different utility
Another significant difference between coins and tokens, apart from the algorithm, is that coins have money utility. Additionally, it can be used to back applications and smart contracts, validate transactions, or use for staking.
For example, Bitcoin is a currency that only holds “money” utility. Another digital asset with money utility is Ether, which is also used to fuel the Ethereum network’s smart contracts.
On the other hand, a token is a digital representation of an asset, tradable commodity, loyalty points, and others.
Maker is an excellent example of this situation. This ERC-20 token is based on a smart contract on the Ethereum chain that backs and stabilizes the value of the DAI stablecoin. Also, MKR is used to pay transaction fees on the Maker system and provide holders with voting rights within the system’s continuous approval voting system.
SIDENOTE. ERC-20 is a technical standard used to issue and implement tokens on the Ethereum blockchain, whose native cryptocurrency is ETHER.
#3 Different Fee System
While trading, a coin can be traded on its own with little to no fees. But when you trade a token, you have to pay a fee for the network it’s based on.
Every operation on the Ethereum platform requires a fee paid in Ether, called gas. The gas is used to allocate EVM (Ethereum Virtual Machine) resources and execute instructions contained in the smart contracts.
#4 Vulnerability to 51% attacks
One of the main goals of the cryptocurrency revolution is to bring about a more secure financial system with no single point of failure. Therefore, the network’s strength comes as a significant difference between coins and tokens.
A coin may be susceptible to a 51% attack, especially in the early stages of forming the network. However, because it’s built on an existing network, the token is improbable to be the target of such an attack.
SIDENOTE. A 51% attack is an attack on the blockchain by a miner (or group of miners) who owns more than 50% of the network’s mining hash rate or computational power. A 51% attack is also known as a Majority Attack.
Coins and Tokens – Which is better to develop or invest in?
By now, the difference between coin and token should be pretty straightforward. However, coins and tokens do not replace each other but serve different purposes. Each one of them is better in the appropriate context.
Crypto coins offer the highest degree of independence and flexibility. On the other hand, they are expensive to build and need large communities to support and adopt them.
The best usage for a crypto coin is as money, to be used as a store and exchange of value. If the project you want to develop is focused on cryptocurrency, the main goal is to create and/or build a platform based on it or propose a new financial system. Then, the coin is the better choice.
On the other hand, crypto tokens are cheap, fast, and easy to develop. They require no maintenance but come with dependence on the leading network, which gives little to no flexibility. Tokens may work as side projects that bring funds to the central business or in any way that they represent tangible assets that can be moved around without physically touching them.
Regarding pricing, coins and tokens are treasured differently, and we have witnessed this situation with the most popular crypto coins, Bitcoin and Ethereum. As such, Bitcoin is considered the most valuable cryptocurrency, having a market cap of $550B, while Ethereum has a market capitalization of around $190B.
As for investors, you first need to know that both tokens and coins can be traded on exchanges as long as they are listed, yet they don’t have an equal value. The difference comes in use cases, whereby a coin usually has money utility.
Additionally, if you want to buy coins and invest, not to exchange them later but to use them, then make sure some vendors accept that cryptocurrency. On the other hand, for your short-term investment plan, you could trade tokens, as they tend to be more volatile and can offer a more significant potential profit.