Cryptocurrency coins and tokens are often used interchangeably. Learn what are the differences between the two.
Though crypto coins and tokens can be swapped, they share multiple differences
Crypto coin operates on its own blockchain network. It can be used as a form of payment, store of value
Tokens are built on an existing blockchain network and serve different purposes
The major difference between coins and tokens is that the former is native to its blockchain network while the latter is not
Confusing cryptocurrency coins with tokens is quite common while paving through crypto journey to understand the space. Though coins and tokens are very much alike on the fundamental level, the main difference between them comes down to utility.
Comparing coins with tokens is like comparing investors with traders. All traders invest but not all investors trade. Coins and tokens represent value, can process payments, and we can swap coins for tokens and vice versa. But, some marketplaces will accept coins but not tokens. On the other hand, coins cannot perform all the activities that tokens can.
What is a coin?
Cryptocurrency coin operates on its own independent blockchain network. It is the “native cryptocurrency” of the blockchain. Coins can be used to pay transactions fees while building the projects on the blockchain. Bitcoin is native to the Bitcoin blockchain network, and Ether is native to the Ethereum blockchain network.
A coin is used as a medium of exchange, a store of value, or transaction fees within the digital economic network. Blockchain networks act as decentralized, distributed ledger that tracks and validates the transactions. The coins native to a blockchain can be transferred between the participants of that particular network.
Building a crypto coin requires substantial resources. Whereas, creating a token is less difficult compared to the crypto coin.
Explore its characteristics
Operates on its own blockchain:
Blockchain keeps track of all the transactions involving the native crypto coin
No physical coins move from one wallet to another, when crypto transactions are made from one person to another
All the crypto coins exist as data on the distributed ledger network
Can be mined:
Crypto coins are extracted through the process called mining
Coins can be mined in two methods - proof of work vs proof of stake
Bitcoin involves the traditional mining method called proof-of-work. It is a high energy-intensive process and is becoming more difficult by the day as there are not many coins left to mine.
Ethereum uses proof-of-stake which is a modern approach to extracting crypto coins. It is lighter and easier to mine
What is a token?
A token is a digital asset built on an already existing blockchain platform. They are non-mineable digital units of value. ERC-20 is the popular token built on the Ethereum network. The facilitation of smart contracts on blockchain networks like Ethereum made the creation of tokens possible. Anyone can create a token by writing codes or using automated tools. It does not require a huge amount of resources as we need in creating a cryptocurrency coin.
There are different classifications of tokens based on various characteristics. While coins are primarily used as a form of payment, tokens have multiple use cases. For example, Chainlink (LINK) is a token built on the Ethereum blockchain network to facilitate the transfer of data from off-chain sources to on-chain smart contracts.
Explore the different types of tokens
Depending upon their type, each token serves different functions. Let's look at the different types of tokens and their peculiar characteristics.
Utility tokens are created to serve a unique purpose on the platform in which they were developed. The common use of a utility token is as a payment method for purchases within the platform. Utility tokens are released by a company to facilitate their customers to buy products or services using them.
For instance, Golem is a utility token that incentivizes users to buy or sell their computational resources using its native token - GNT.
Security tokens are also called equity tokens. They act like a stock or share of the company. Token holders will get rights along with a share in the asset by purchasing a security token. These tokens are backed by real assets such as gold, real estate, or bonds. They represent the value of real assets and can be used to buy or sell the assets.
For instance, BCap is a security token that represents an indirect economic interest in the limited partnership interest in the tokenized investment fund.
Stablecoins are the digital versions of fiat money. These tokens are pinned to a stable currency like the US dollar or an asset like gold. Popular examples of stablecoins are Tether ($USDT) and USD Coin ($USDC).
Non-fungible tokens (NFTs)
NFTs primarily act as digital collectibles and represent ownership rights to a unique digital asset or real-world asset. They are not fungible to replaceable like one US dollar can be replaced by 100 cents. NFTs are mainly used to issue unique digital items like artworks or rare items used in a video game.
Governance tokens are specialized DeFi tokens that give decision-making rights to the holders. All stakeholders can collaborate, debate, and vote to maintain a decentralized system. Governance tokens support blockchain-based voting systems and are used to vote for new proposals.
Major differences between coins and tokens
Coins run on their own blockchain platform, whereas tokens are built on an existing blockchain platform.
Coins can be used as digital currencies for payments and as a store of value, while tokens serve multiple purposes.
It is relatively less expensive and easier to create tokens than coins.
Tokens can be created using automated tools and templates, whereas creating a coin requires a completely new blockchain network.
Crypto coins are extracted by mining while tokens are non-mineable.
Runs on its own blockchain platform
Built on an existing blockchain platform
Store of value/Digital currencies for payments
Serve multiple purposes depending upon their type
Creating new network, more resources
Can be automated using existing tools
No mining can be done
Coin or Token?
Cryptocurrency coins and tokens both are essential to the ecosystem. Having fundamental and technical knowledge about different types of cryptocurrencies will help users in evaluating cryptocurrencies better.