The crypto industry is filled with confusing jargon, buzzwords, and arcane terminology. And if you’ve decided to dive into the cryptoverse, you’ve probably heard of the terms coin and token before. Even industry experts sometimes use them interchangeably, ao it’s not a big deal if you confuse them. But like concrete and cement, coins and tokens are different.
The terms “coins” and “tokens” are often used interchangeably in the crypto space, but they actually refer to different concepts. It is easy to confuse them as they both fall under the umbrella term “cryptocurrency”. Simply put, cryptocurrency is a digital asset based on blockchain technology, and tokens and coins fit that definition.
Being aware of the difference between tokens and coins can help you better understand the cryptocurrency market. Token and coin projects can present various technical challenges.
What is a coin?
A coin is a digital asset in a blockchain network that is used as an exchange and store of value. It runs on its own blockchain network, not on another asset’s blockchain. This also means that these coins will not disappear from the network, but the changes will only appear on account balances.
Cryptocurrencies or coins are created by mining, a process that typically uses Proof of Work (PoW) or Proof of Stake (PoS) validation. PoW uses massive amounts of computing power to solve math problems and creates coins to reward miners. PoS mechanisms create and confirm transactions based on holding coins. In addition, cryptocurrencies are used to pay transaction fees on their network.
Cryptocurrencies are decentralized so they do not depend on any central authority to operate. Instead, computer nodes manage all transactions and activities. The code allows network users to trade within the rules automatically –- without permission and “trustless”, meaning no trust is needed, as transactions are enforced by smart contracts that only execute when the conditions are met.
Each coin is defined by the following characteristics:
- Runs on its own blockchain. A blockchain tracks all transactions related to its native coin.
When you pay someone with Ethereum, the receipt goes to the Ethereum blockchain. If the same person pays in Bitcoin later, the receipt goes to the Bitcoin blockchain. Every transaction is encrypted and accessible to all members of the network.
- Works like money. Bitcoin was created for the sole purpose of replacing the traditional currency. The appeal of transparency and anonymity has inspired the creation of other coins, including ETH, NEO and Litecoin.
Using coins, you can buy goods and services from many major companies such as Amazon, Microsoft, and Tesla.
- Could be mined. You can earn cryptocurrencies in two ways. One is traditional mining in a proof-of-work (PoW) system, and the other is proof of stake (PoS) validation which we previously discussed.
What is a token?
Crypto tokens are simply cryptocurrencies that do not belong on any specific blockchain network. These types of digital tokens are built on other blockchain networks that use different DeFi platforms. A good example of such blockchain host networks is Ethereum. Ethereum hosts many digital tokens on its blockchain network.
Currently, there are thousands of crypto tokens on the market. Some of these crypto tokens include: Tether (USDT), USD Coin (USDC), UMA, Basic Attention Token (BAT) and DAI.
Tokens are mostly used for certain functions. For example, tokens can be used for voting or betting or for DeFi functions. A good example is Brave Browser, which uses the Basic Attention Token (BAT) to reward browser users. Users are paid in BAT when they view ads from the browser’s partners.
Tokens act as a utility tool in the crypto space and are also used to incentivize certain user behaviors. Some of the features of crypto tokens are:
- Access – Tokens can be used to access a specific product or service. For example, the FIL token is used to access the Filecoin platform.
- Security – Security tokens are issued during Security Token Offering . These are mostly evidence of real estate investments such as inventories and fixed assets.
- Stablecoins – Stablecoins are fixed-value tokens pegged to fiat currencies such as dollars and euros.
- Payment – Payment tokens allow the transfer of payment for products and services. These types of tokens are almost similar to coins.
- Assets – Asset tokens are related to real assets such as real estate and precious metals. An asset token can be used to represent an actual investment.
- Non-Functional Tokens – These types of tokens can be virtual or real. They are sometimes used in online games, but have an impressive variety.
The difference between a coin and a token
Coins must be used directly as currency and as a store of value. In other words, homeowners can use them to pay for goods and services. On the other hand, while tokens can be used for payments, they also have other uses and play an important role in DeFi, gaming and DEX.
For example, AAVE is the Aave protocol token. Aave is a DeFi protocol that allows the lending and borrowing of cryptocurrency without a centralized intermediary. Aave is built on the Ethereum network, and all of its transactions use AAVE tokens, which run on the popular ERC20 token standard.
Coins are created on a blockchain platform. The project involves developing security protocols and reward systems, as well as dictating how coins should be created, how coin supply should be managed, and how transactions should be recorded and processed.
At the same time, tokens rely on existing protocols for their functional blockchains. Interestingly, one token can work on multiple blockchains. This gives tokens the advantage of speed and flexibility, meaning they can be more easily traded with other digital assets. For example, Tether issues tokens on several blockchains, including Ethereum, Tron, Bitcoin, Algorand, SLP, and OMG.
The crypto vs token debate is an interesting one, depending on which side you’re on in the crypto space. However, it is quite clear that coins are a better choice than tokens. They have a better store of value, they have their own blockchain network, and they can be used to exchange both goods and services. But if you’re still not sure, you can quickly decide which one to use by analyzing what you’re going to use it on. If it’s a product, it’s recommended to use coins. If it’s a service, you can usually use utility tokens.
